Dr. Oren Harari

Why GE Doesn’t Deserve The Applause

2008-07-22T18:50:00.000-07:00

I’m beginning to sketch out my next book and I can’t figure out how to position GE in it. Even though I’ve written some nice things about GE in prior articles and books, I have a confession to make. I’ve never completely understood the seeming success of GE’s business model, nor its titanic reputation in the business community.You see, GE violates what I and many other experts consider a fundamental tenet of competitive advantage: Companies that are focused on dominating one market, or just a few, select, synergistic markets will perform better than companies which have a presence in numerous and disparate markets. Conglomerates spread their resources and management attention too thin over diverse businesses that often require vastly different sets of customers, value propositions, competencies, infrastructures, technologies, and networks. Research has documented the frequency with which individual companies once buried in conglomerate portfolios performed significantly better once they were divested, a.k.a. liberated from the centralized, standardized, bureaucratic tentacles of corporate conglomerate headquarters. Bear with me on one more paragraph of “acadamese” and then I’ll deal with GE directly (or skip right to the next paragraph). The term “conglomerate discount” applies to the finding that highly diversified companies are, and should be, valued lower than less diversified companies. For example, writing in the International Journal of Theoretical and Applied Finance in 2006, Swiss professors Manuel Ammann and Michael Verhofen note that a conglomerate can be regarded as an investor’s option on a “portfolio of assets” (the companies bundled as one conglomerate package). By splitting up the conglomerate, they point out that the investor now receives a portfolio of “options on assets”; that is, the investor now has specific choices among a variety of assets that used to be part of a bundle but are now separated in the free market. Ammann and Verhofen demonstrate that for investors, the value of a free-market portfolio of options (your carefully determined choices among independent companies for investment purposes) is “always equal to or higher” than the value of simply giving you, the investor, an option on one bundled portfolio, like a conglomerate. Small wonder that conglomerates typically underperform the S & P 500.So both in terms of performance and investment, conglomerates are a lousy bet. And since GE is a conglomerate of widely diverse companies (more on this shortly), why is GE considered the paragon of management? Well, everyone immediately points to the fact that under Jack Welch’s 20 year reign (1981-2001), GE’s market cap grew from $14 billion to $410 billion. True, but why? I suggest that it was because of Welch’s enlightened and pigheaded commitment to downsizing big fat pockets of non-value adding personnel, divesting long-standing poorly performing business units, attacking the company’s history of paralyzing bureaucracy and complacency, violently shaking up a rigid top-down hierarchy, and forcing managers to be accountable to new, aggressive performance standards. The combination of Welch’s unique leadership skills, the wealth of low-hanging company fruit to pick, and the investment community’s embrace of the practice of “managing earnings” during the 1990’s—all led to healthy financials, a rock-star status for Welch, and enthusiastic, transfixed investors (and business writers). But everything’s changed. The low hanging fruit’s been picked, the markets have experienced constant disruption, “managing the earnings” is less tolerated, and global competition has intensified to the point that it’s much much harder to meet the famous Welch standard that every GE business be #1 or #2 in the industry. In fact, check out GE’s returns over the last 50 years and you’ll see that apart from the Welch years, the growth in stock returns has, on average, been modest. Under current CEO Jeff Immelt’s seven year tenure, GE’s stock has plummeted by 30%. I say that it’s all because GE is a conglomerate, and a conglomerate—especially an enormous global $170 billion conglomerate like GE--is much harder to steer towards sustained success in today’s economy, even for someone like Immelt who is arguably a very accomplished business leader. Now I’m sure that Immelt would vehemently object to my analysis. I understand from people who know him that he’s a genial guy, but the quickest way to tick him off to suggest that GE is a conglomerate. From his perspective, GE is something like an intimate union of synergistic teams operating under a common thread of culture and values. Come on, Jeff, cut the crap. GE’s own website cites its market presence in (alphabetical order) appliances, aviation, consumer electronics, energy, finance (individual and business), health care, lighting, media, entertainment, oil, gas, rail, security and water. (By the way, that list doesn’t include the recently divested insurance and plastics businesses). There are so many diverse products and services within that classification that GE has to list them within an “A to Z” list, and that’s just for starters on a general website. So spare me the noble rhetoric about synergy and common culture. GE is a bloody conglomerate! It’s a testament to Immelt and his management team that they’ve actually done a pretty good job of meeting growth and earnings projections while riding such a humongous multi-limbed beast. But the Street isn’t impressed, because investors seek future earnings and cash flow, and regardless of how good Immelt and his team are as leaders, they’re managing (uphill) a massive disparate structure trying to cope with massive disparate markets—and investors are rightfully skeptical. You know what I’d tell Immelt? “Shrink and grow, baby!” Focus on just a very few fast-growth future-oriented markets that you’re already in—like alternative energy, new paradigm aviation engines and personalized medicine—and dump everything else. Okay, keep GE Capital, but shrink it, and dump NBC, dump railroad, dump appliances, dump lightbulbs, just go down the list and keep only the (few) seeds of the future. Trim the company (rather, put it on a crash diet), clean up the balance sheet, liberate a ton of cash for new investment, and focus your leadership skills towards helping GE dominate a few select future-growth sectors with innovation, customization, and scale. What worked for Welch in the ‘80’s and ‘90’s won’t work today. I say: Jeff, if you de-conglomeratize GE, you’ll be a bigger hero than Welch. And, just in case you care, you’ll be a “super hero” in my next book.

The Value of Dominating Underserved Markets

2008-07-09T18:49:00.000-07:00

If you want to win a quick bet, ask your friends which car rental company is the biggest in North America. If they say Hertz or Avis, you can smile and shake your head—and pocket your winnings. Then titillate them further and say that this company is the most profitable car rental company too. It’s Enterprise. What’s the secret? Well, first, a genuine institutional commitment to customer service--which yields an exceptional customer loyalty. (As rated by independent players like J.D. Powers and Market Matrix, Enterprise consistently receives the highest customer satisfaction scores in the industry). But the real competitive whammy is that the company’s commitment to service, and its extraordinary growth, has been wrapped around a unique business model. Rather than competing directly against huge powerhouses like Hertz or Avis in airports and hotels, Enterprise grew by building, and dominating, a previously underserved market—in this case the “home city” market. In hindsight, it seems brilliantly obvious how often we need a car in our own town or city—like when our car needs mechanical repair, or is in an accident (or stolen), or when out-of-town relatives come stay in our home and need a car for just a couple days in the middle of their holiday, or when an out-of-town business associate quickly needs a car for a few hours in the middle of the day in order to get to a couple appointments. At that point, a nearby Enterprise office (strategically located, there’s a branch office within 15 miles of 90% of the U.S. population) will send someone to pick you up, provide you with a genuinely positive concierge service, and then after you’re done with the car, drop you off. Enterprise still dominates this lucrative market, and what’s more, the growth of the brand’s customer loyalty became so profound that Enterprise was able to expand cautiously, but profitably, into the big competitors’ airport territory. I thought about Enterprise when I received a note from Bernard Rapoport describing his gala 90th birthday party in Washington D.C. earlier this year. I’ve written about “B” in a couple of my books. Remarkable fellow. Still very active in a variety of ventures, even after retiring ten years ago from the CEO position in the company he started over fifty years ago: American Income Life Insurance. American Income is a billion dollar insurance company has been rated by A.M. Best, one of the country's oldest and most respected insurance ratings company, as A+ (Superior) for overall Financial Strength. But I’ll bet you’ve never heard of American Income. That’s because it doesn’t compete directly against the high-profile behemoth insurance powerhouses across all markets. (Initially, it did, and got creamed before switching direction). The company’s successes are due to the fact that it focuses on providing specialized products and unique services for what used to be an underserved market: lower income working families, labor unions, credit unions, and some professional associations. “Labor” is American Income’s core market, and I remember when I first met “B”, he told me that every employee at American Income is a card-carrying union member—including himself! During his birthday speech, here’s how Bernard Rapoport described the origin of the American Income business model in the early 1950’s: “When I was in New York in the early days, the company wasn’t doing well; it wasn’t growing. I looked up at the skyline and saw all the skyscrapers that belonged to the large companies like Metropolitan Life, Prudential Life, Equitable life, etc. I shook myself and said, 'I can’t compete with those companies. They’re too big! What I’m going to do is I’m going to give the big companies 235 million Americans and I’m going to take 15 million Americans for American Income.' I went to the labor leaders and told them that we were going to be the union company. Everyone in our company would be a union member and from that point on we were exceedingly successful.” What’s the lesson that Enterprise and American Income have learned? Great customer service is a great idea, but its market and financial impacts are logarithmically expanded when that great service is applied to virgin nascent market spaces that you can ultimately dominate. So instead of rabidly competing with everyone else in the same arena for scraps of market share the way hungry dogs fight for a lone piece of meat, always look for those untapped, underserved, potentially lucrative markets—and then commit to doing whatever it takes to grow them, and “own” them.

What Do Amazon and Zipcar Have in Common?

2008-06-27T18:49:00.000-07:00

Some of you might respond “The answer is that Amazon is now selling Zipcars!” You’d be wrong. Some of you might respond “What the hell is a Zipcar?” That’s probably where we need to begin. Zipcar is a Cambridge, Massachusetts-based company that allows its members to reserve a car online for rental (no waiting in line, no face-to-face human interaction at all), then go to one of numerous small facilities scattered around city neighborhoods throughout the country, then locate “their” parked car, unlock it by waving their pass card over a sensor on its windshield, grab the key hanging inside, then drive it away for the block of time they’ve reserved (at $6 to $10 an hour), and finally return the car to the same parking facility after filling up the tank. Fast-growing Zipcar boasts 200,000 members in 50 U.S. cities choosing among 5,000 cars. The company is also in Vancouver and London, and is expanding into 15 European cities. Customers tend to live smack in the middle of urban areas where driving and parking cars is a major hassle. My book agent Lynn, for example, lives in Manhattan and likes Zipcar so much that she sold her own car. As a Zipcar member, when she needs a car for a few hours, or for a day over the weekend, she simply signs up for a car and picks it up in a building within a short walk of her townhouse. Unless you’ve been in a deep slumber for the last couple decades, Amazon needs no introduction. But did you know that Amazon’s new, fast-growing business is renting out computer capacity? Amazon has such vast, and now excess, capacity in servers and digital storage that its new category of customers is the nearly 400,000 firms that don’t want to build and maintain data centers and related infrastructure but are perfectly willing to rent it from a reliable brand like Amazon. So what, then, do Amazon and Zipcar have in common? They have both seized a huge opportunity: frequently, customers today prefer to borrow and rent rather than to acquire and own—especially if the rental provider can make their lives easier, happier, more efficient, and more productive. Consider trends like outsourcing, “cloud computing” (computing and storing data on the Web rather than on individual local computers), InnoCentive-type web sites (where companies post thorny scientific and technological problems that their own staffs can’t figure out with the goal of attracting—with appropriate incentives-- imaginative responses from independent minds around the world), and the increased strategic allure of deep collaboration and intimate partnership among companies rather than outright acquisition. These trends are a natural offshoot of something really big: In today’s marketplace, where customers are overwhelmed by information and choices, and where vendors have to maintain lean agility and perpetual innovation—sometimes it makes a lot more financial and strategic sense to rent the best talent and resources rather than to pay big bucks (and make even bigger commitments) to own them outright. From A to Z, Amazon to Zipcar, we’re seeing the emergence of something big. Are the leaders in your company discussing how to capitalize on it?

This Bud's For InBev

2008-06-20T18:48:00.000-07:00

Seems like InBev is serious about acquiring Anheuser-Busch (A-B). The Belgian brewer has made an unsolicited offer of $65 a share, or $46 billion, in cash. That’s a significant premium over A-B’s current stock price. The financial and legal shenanigans are already taking place. A-B is looking to cut a side deal, maybe with the Mexican firm Grupo Modelo, to make itself less attractive. That has annoyed InBev CEO Carlos Brito, who warned A-B’s board that “…we believe it is important for you and your Board to understand that our proposal to combine with Anheuser-Busch by means of acquiring all Anheuser-Busch outstanding shares for $65 per share in cash is made on the basis of Anheuser-Busch’s current assets, business and capital structure.” He’ll probably have to up his bid, maybe to $70 a share. At what point does the price become untenable? Further, a number of other strategic issues should be taken into account, and they usually aren’t because the dealmakers usually see only the financial and legal aspects and ignore the so-called “soft” stuff that can easily screw up the rosy post-merger projections. If I was advising Brito, I’d warn him about four things to pay very serious attention to:• Good old fashioned politics. A-B is about as “American” a brand as one can imagine, Budweiser is the "King of (American) Beers", and there might be some stiff political resistance to a “foreigner” coming in—especially in a political climate where free trade and outsourcing are hot button issues. Already, Sen. Claire McCaskill, D-Mo, has formally urged the A-B board to reject the offer. Many local political groups have done the same. Is this just some normal posturing, or is it more than that? If neighbor Barack Obama of Illinois gets into the fray in an election year (remember, the Teamsters, who represent many of the A-B drivers, have endorsed him for President), things could really get interesting. • Good old fashioned unions. Teamsters or otherwise, they don’t like the deal, and unhappy employees are not something an acquiring firm would like to inherit. This is especially salient because InBev has a history of tough approaches with unions. The company has laid off hundreds in five countries in Europe, where it’s pretty hard to lay off anyone. • Good old fashioned differences in business philosophies. This one could be a big wild card. A-B is a marketing machine. Spend those umpteen dollars on a gazillion ads and promotions, no holds barred. Focus on innovation in marketing rather than on product development. That’s how—despite stagnant earnings and an unimpressive stock valuation-- it’s maintained a hefty market share with a pretty mundane lineup of beers. In contrast, InBev grows by acquisitions followed by aggressive cost cutting. You see the potential problem here? • Good old fashioned fantasy thinking. In my books and articles, I’ve pointed out that there are indeed good strategic reasons for acquisitions, like obtaining cutting-edge technologies or gaining a quick entre into a fast-growing market. But InBev’s strategy is different, and far riskier: It wants to buy market share, plain and simple. With one stroke of the pen, its current tiny presence in the U.S.would balloon to a nearly 50% share of the largest beer market in the world. That sounds nice, but consider: The U.S. beer market is now fragmented and hypercompetitive, new micro breweries with tasty products and loyal fan bases are springing up left and right, and most important, the U.S. market as a whole has been growing very slowly for years. On top of that, InBev’s basic premise is that A-B’s customers will cooperate with the deal; that is, they won’t defect. But there’s no guarantee of that, as so many serial acquirers have found. And if InBev’s cost-cutting campaign wipes out A-B's expensive marketing initiatives that have propped up market share for years, the problem could be aggravated further.

How Getting Stuck in an Elevator Can Help Your Business

2008-06-13T18:47:00.000-07:00

My wife and I recently had dinner with our friends Jean and Steve, who told us a tale that was not only amusing, but one that will help you make a very important business decision. Seems like earlier this year, Jean and Steve went to Arizona for major league baseball’s spring training. A lot of fans do this. One day, they got tickets to a game featuring their beloved San Francisco Giants playing at Diamondback Stadium in Phoenix. They took the elevator to get to their seating level--and it got stuck. And stayed stuck. After a few minutes of solitary waiting, Jean pressed the emergency button and sure enough, a voice from the outside came through. Muffled and blurred, but at least a voice. So far so good. Then the conversation began in earnest: Jean: “We are stuck in the elevator.” Voice: “Where are you?” Jean: “In the elevator behind home plate.” (Pause). Voice: “Where?” Jean: “In the elevator behind home plate, the one that goes up to the box suites.” (Pause). Voice: “Where are you exactly?” Jean (a little irritated): “We’re in an elevator behind home plate at the stadium.” Voice: “Where?” Jean (a little more irritated): “The baseball stadium. In Phoenix.”Voice: “Uh, where?” Jean: (sharply): “The stadium. In Phoenix, Arizona.” (Pause).Voice: “Hmmm”Jean (exasperated): “Excuse me, where are you?” Voice: “I am in India, madam, and if you give me more specifics, I will be glad to assist you. Where are you?” At this point, Steve muttered a few choice expletives, then took matters into his own hands. He slowly forced the elevator doors open, and both he and Jean were able to lift themselves up the three feet to the next level. Over dinner, the story was funny, but at the time, they felt very frustrated. My wife, who has a slight phobia about elevators to begin with, said she would have panicked. Either way, it wasn’t the greatest moment in outsourcing history. So here’s the lesson for you business leaders. In today’s global economy, you should always be looking for outsourcing opportunities, even offshore. You should do it not merely to lower your upfront costs, but just as important, you should do it to get rid of non-value-adding functions and assets that suck up your resources and distract you from focusing on the innovations in products and customer care that your company needs to thrive. It makes sense for the Diamondback leaders to outsource the telephone response unit in the elevators. They should concentrate on constantly improving amenities like the baseball team, the seat comfort, ticket selection, food, the lawn on the field, fan loyalty programs, and so on. So outsourcing elevator maintenance is a sensible idea, and frankly, with today’s global communication and information technologies, it technically shouldn’t matter that the call center work is done in India. But—and it’s a big but—never let your outsourcing activities adversely impact the quality of your products and customer service. (Actually, an increasing number of imaginative companies are working with their outsourced partners not just to reduce costs, but to create an improved environment for products and service—but that’s another story). In other words, don’t let your quest for short-term cost savings damage your relationship with your customer. Like many companies, Dell found this out when it had to bring back a number of call center functions from India because American customers were complaining that the service reps could not speak clearly or truly understand the subtleties of their (the customers’) problems. Remember, the customer doesn’t differentiate between you the provider and your supply chain partners. If your partner screws up, the customer blames you—in this case, the Diamondbacks organization. So always stay on top of these supplier relationships, especially when they touch the customer. If customers are in any way distressed by the relationship, fix it or cancel it. Yes, capitalize on opportunities to farm out work that’s not your core competency, but remember that customer care must always remain your top priority.

Authenticity Matters

2008-06-03T18:47:00.000-07:00

In my book Break From the Pack, I argued that authenticity is essential for customer care. That is, if you want to use customer service as a point of brand differentiation and a path to competitive advantage, I wrote that “…you must genuinely believe in what you’re doing—and show it. You must commit to it with your entire heart, or you shouldn’t try it at all.” I wrote further that as a leader, you must insure that authenticity is not limited to idiosyncratic occasions or demonstrated by just a few fanatics, but rather is institutionalized so it becomes a core part of the way the firm (and all its employees) do business. Sounds reasonable, right? Unfortunately, many customers see true vendor authenticity as a relatively rare phenomenon. Recently, my family and I stayed on a Disney property in Orlando. Our first morning, I called downstairs to try to arrange a schedule for the day. Like most customers who don’t fit into a vendor’s carefully developed standardized “plan”, our wishes (for which we were fully prepared to pay) had some unique twists. Repeatedly, the “cast member” (Disney-speak) at the other end told me, without a drop of empathy and without a single “how about this?” alternative suggestion, that no--she couldn’t do that; no, she couldn’t answer that; no, that wasn’t her office’s responsibility; no, she couldn’t tell me who to talk with; no, no, no, no…. After 15 minutes, I was so frustrated that I finally blurted out: “I’m paying an arm and a leg for a deluxe room on your premium floor, and you’re telling me you can’t do anything for me, can you?” Her response, without a shred of embarrassment, was “That’s right.” My rejoinder was a snappy “I’m really disappointed. Good bye.” And then do you know what she said—mechanically, emotionless-- right before I hung up? I kid you not: “Have a magical day.” I had to laugh. They all say that at Disney. Of course, in this case, it was just words. They were as meaningless as some of those snazzy marketing promotions and noble mission statements and sweet-sounding communications memos to employees that turn out to be just words and no more. For me and my family in Orlando, that experience was more than inauthentic. It was demeaning. We managed to have a good time on our holiday, but we remembered……. In contrast, because it’s relatively rare, customers know when they experience genuine and deep authenticity, and it affects them profoundly. Last month I was called to jury duty. I intellectually understood, and accepted, my responsibilities as a citizen. Nevertheless, I confess that I arrived at the courthouse with a mixed sense of resistance, dread and resignation. As it turns out, I didn’t have to serve. The case was apparently plea bargained, and after several hours of waiting all 70 of us were sent home. Yet I am still blown away when I reflect upon the authenticity in the experience. First, upon arrival at the jury waiting room, I was greeted with a sincere smile by the staffers. I was thanked immediately for coming. Everyone who came was repeatedly and profusely thanked for coming. Based on the results of opinion surveys, the waiting room was Wi Fi’ed for laptops and equipped with four computer terminals for those without laptops. Coffee and tea and cookies were available. The chairs were comfortable, the room light and airy. A judge on another case came in and with warmth and humor explained how our roles fit into the process of justice and why our presence was important even if we didn’t actually serve on a jury—and he thanked us again. Whenever any of us had questions, someone on staff was available for a quick response. Every 20 minutes one of the staffers would go in front of the group and brief us on what was happening downstairs among the lawyers and how it might impact us. After answering any questions, the staffer would (each time) tell us a corny joke, then apologize for keeping us waiting, and once again thank us for being there. Sure, we were all happy to go home after nearly four hours, but I gotta tell you—I feel a lot better about jury duty than I ever have. The experience I had wasn’t full of fancy expensive bells and whistles (like at Disney World, for example). It just had a lot of personalized and institutionalized authenticity. The place reeked of it. And that made all the difference in the world. You know why? Here’s the secret, and whisper it to all your sales and marketing folks, to all your service people, to anyone whose work will somehow touch and impact the customer’s experience: As customers, we are absolute suckers for authenticity.

Welcome the Wolverines

2008-05-21T18:46:00.000-07:00

A quick postscript to last week’s blog about Microsoft-Yahoo (and then I’m done with this subject, I promise): Speaking strictly professionally, I view Carl Icahn (the old corporate raider, greenmailer and current CEO of the hedge fund Icahn Capital) the way I would a wolverine. I see both of them as ruthless, fanatically determined, and exceedingly dangerous when crossed. Since I wrote last week’s blog castigating Jerry Yang for failing to embrace Microsoft’s lofty life-support offer of $33 a share, Carl the Wolverine has entered the fracas with the obvious question: Where the hell has Yahoo’s board of directors been all this time? Of course, we know the answer, and the answer transcends Yahoo. Boards of directors are supposed to serve as a check to CEO power run amok. They are supposedly responsible for fiduciary oversight on behalf of shareholders. In reality, they are often a joke. In many companies, they’re cronies of the CEO (who often has chosen them). Or they’re part of a good-old-boys network operating with the implicit understanding that their job is to lob softball queries to the CEO without embarrassing him/her. Or, in a classic follow-the-money scenario, they make sure not to jeopardize their lucrative “director” gig by doing things like, well, asking uncomfortable questions and holding CEO’s accountable for dumb decision. That’s where Icahn comes in. As a self-professed shareholder advocate, he has been a royal pain in the butt to a number of lethargically performing companies laden with entrenched executives--like TWA, Motorola, and Blockbuster, among others. Sometimes he wins, sometimes not, but his “M.O.”, often sorely needed, is to shake up the complacency of top management when corporate performance has stagnated and shareholders are long-suffering. Icahn Capital has bought 4.3% of Yahoo shares, and along with allies like hedge fund investor John Paulson (3.7%) and old warrior T. Boone Pickens (.75%) Icahn is agitating to unseat Yahoo’s board and replace it with a new slate that would be more responsive to insanely generous offers like Microsoft’s. Of course, before we cast Icahn as a hero, let’s remember that like all wolverines, he and his ilk can be mindlessly destructive. Sometimes, these “shareholder advocates” are so self-centered and short-term in their approach to the business (‘do whatever it takes to raise my share price so I can clear out with a fat return on my investment, damn the consequences’) that the longer term prospects of the firm are seriously damaged. For example, I remember back in 2003, then- CEO of Kodak Daniel Carp unveiled his grand plan to dump much of the cash-cow film business, cut annual dividend by 72 percent, and plow billions into building a strong presence in the fast-growing digital imaging market. A lot of wolverine investors howled (which ironically helped depress their stock by the way). Their reasoning was that Kodak should have used its income and free cash flow not for the long-term risk of transformation, but for supplying investors with juicy dividends and for temporarily propping up the old business to get it ready for sale. Let Kodak die if the price is right, snarled the wolverines, which would have been a justifiable option if Kodak leaders were clinging to a dying business model. But they weren’t. To their credit, Kodak leaders ignored the nay-sayers and moved aggressively towards their new goals. Kodak is still shaky today, but at least it is off life support and I wish its current leaders luck.Sometimes the wolverines lose themselves in a feeding frenzy. Remember how “Chainsaw Al” Dunlap systematically gutted Scott Paper and Sunbeam in the 1990’s? Dunlap never lacked for “shareholder advocates” who loved his approach, because they were able to bet on Dunlap to eviscerate the companies he ran and then carve up the carcasses to sell off at the most attractive prices. Who cared that what Dunlap was doing was essentially destroying companies and hence participating in a grotesque parody of “creating shareholder value”? The wolverines loved it. Having said all this, sometimes shareholders need those wolverines when it’s clear that CEO’s and boards of directors are either paralyzed with incompetence, or serving their own interests more than shareholders’. And even though I’ve argued that Microsoft would not be wise to do this deal (see http://www.harari.com/blog/index.php?/archives/169-Poor-Goliath-Seeks-a-Bride.html), I think Icahn is absolutely correct to put public pressure on Yahoo’s directors to justify why they didn’t leap at it. I think it’s fair to state the following challenge to Yahoo’s senior leadership and board of directors: Please unveil a concrete growth plan that will arguably raise investors’ confidence to the same level of stock value that Microsoft was offering, or thanks for the memories and let someone else take the helm.

Jerry Yang’s Empty Nest

2008-05-13T18:46:00.000-07:00

I have a friend who will be an “empty nester” this fall. The last of his kids are off to college, and he and his wife will have to figure out what to do with each other and the rest of their lives. It’s a bit scary, he confesses, but he’s up for the next phase of his mortality.Too bad Jerry Yang isn’t. Yang, as you know, is the CEO of Yahoo, the same CEO who turned down Microsoft’s $47.5 billion acquisition offer. Those of you who follow my blogs know that I was critical of Microsoft’s pursuing this deal (see http://www.harari.com/blog/index.php?/archives/169-Poor-Goliath-Seeks-a-Bride.html). I thought it was a lousy buy. Still do. On the other hand, from Yahoo’s end, Yang’s refusal of Microsoft’s offer is, financially speaking, astonishing. Microsoft was offering $33 a share, a 62% premium over Yahoo’s closing prices during the mating dance between the two companies. The only logical reason to turn down the deal is if your own growth strategy will yield greater value for shareholders than the Microsoft offer. Fat chance. To be sure, Yahoo is a giant Web presence, boasting mega-traffic and an admirable 3 hour average time that visitors spend on the site per month. The only trouble is that over the past few years, the company hasn’t figured out a way to monetize that traffic into sustainable and profitable growth. Microsoft CEO Steve Ballmer offered Yang a magic bullet to solve his company’s woes in one fell swoop, and Yang threw it back in Ballmer’s face. Yang’s rejection of Microsoft has little to do with logic. It has everything to do with psycho-logic. You see, Yahoo is Yang’s baby. He fathered (mothered?) it with David Filo. He can’t bear to see the offspring leave home forever, especially into the embrace of a new lover in Seattle. He can’t deal with the possibility of the empty nest. It’s not about money. Yang doesn’t even take a salary at Yahoo. Based on his stock, he’s a billionaire one way or the other. It’s about ego and fear. If Yahoo is swallowed by Microsoft, what’s Jerry going to do with the rest of his life? How will he deal with no longer being the top dog alpha male independent rock star who started and runs one of Silicon Valley’s sexiest dotcoms? How’s he going to deal with his “kid” running off to join the “Evil Empire”? As Bay Area software consultant Lloyd Kurzweil says, “He’s thinking of himself, not the company.” We all think about our own welfare, but in a publicly traded company, the CEO’s primary fiduciary responsibility ought to be to shareholders. Over the years I’ve seen this syndrome pop up with some entrepreneurs. They can’t let go of their baby. When it’s time to sell, or even when it’s simply time to hire some new senior managers and let them run the show, or even when it’s simply time to delegate more control to existing managers, some entrepreneurs grit their teeth going forward. A few simply can’t go forward at all. Once again, if Yang had a legitimate growth plan that would surpass Microsoft’s offer, I’d applaud his efforts to stay independent. But what is it? There are rumors about a “partnership” with Google. Even if such a partnership passed the antitrust test, I predict that Google would eat Yahoo alive. And frankly, there’d be little benefit for Google to go through the hassle. Some say that all this is a bargaining ploy for a higher offer from Microsoft. I doubt it. I think Microsoft CEO Steve Ballmer was unwise to make the offer in the first place, but kudos to him for controlling his own ego and backing off when the ask price became absurd. Some analysts are predicting that Yahoo’s stock will sink down to $21 once the investment community is 100% certain that no Microsoft deal will happen. $21. Compare it to $33. Then tell it to shareholders. That’s some nest Jerry Yang is protecting.

Lessons From Swagelok

2008-05-06T18:45:00.000-07:00

So a couple weeks ago I was in Athens, Greece, addressing a group of Swagelok executives and independent distributors of Swagelok products from Europe and Africa. (Swagelok, based in Cleveland Ohio, is a billion dollar global supplier of many vital manufacturing products like tube fittings, valves, gauges, transducers, regulators, hoses, filters, and a whole host of welding and fluid systems). My seminar was about strategic collaboration for competitive advantage, and I hope the participants learned something from it. But I myself always learn from my clients, and I'd like share with you four wonderful points that the Swagelok folks raised in the course of our discussions. 1. Simon Cooke, based in England, threw out a great observation: “Without mystery, there is no margin.” He was referring to the fact that regardless of a company’s size and marketing budget, if its product/service mix is basically conventional and “me-too”, margins will inevitably shrink. IBM CEO Sam Palmisano once echoed this sentiment: “If you do what everybody else does, you have a low margin business.” I wish more executives in all industries understood that all the size, scale, scope, reach and marketing pizzazz will not compensate in the long run for products that are mundane and “common”. It's when products and services break new ground—when they invoke some “mystery” and excitement—that margins will follow. 2. Hans-Peter Knippel, based in Germany, pointed out that one way to keep a company agile, brain-based, customer-focused and collaborative is to create digital networks that would bind all relevant constituencies—Swagelok employees, distributors, and customers, for example—together in one seamless grid. I loved this concept. Imagine, I suggested, if anyone in the Swagelok “community” could immediately access the right people in that community to obtain mission-critical information, or solve common vexing problems, or share important data and vital resources, or form a project team to pursue common goals. The capacity to digitally connect with the right people inside and outside the organization is the next wave of the future for any company, as far as I’m concerned. The people at Cisco Systems agree; they’re already pursuing what they call Cisco 3.0, the hardware building blocks for constant, real-time interaction and information exchange regardless of location. Ask your kids—they already know the enormous power of virtual communities like Facebook, MySpace and Ning. Maybe you should make sure that your company’s next consultant is no older than 16. 3. Pierre Fischer, based in Germany, with plenty of experience in Africa, observed that the most imaginative ideas about product application often come from customers in developing countries who use that product. Their resources overall are often so slim that they have to get really creative, so much so that they often use the products in a variety of ways that the vendors never anticipated. That struck a bell with me. I’ve been amazed when I’ve seen the creativity of mechanics in developing countries who fix things and make them work when they have nothing but the most rudimentary resources at their disposal. Pierre Fischer’s point is that if the vendor really “listens” to customers in developing countries—i.e., really observes what they do with products and why, rather than just view those people as a “sale”—then that vendor can glean some amazing clues as to new products, new product uses, and new markets. 4. Everyone discussed the importance of execution, and in that context the concept of time emerged. Time can either be a debilitating cost (when it drags on and on before decisions are made or things get done) or a value-adding currency (when it reflects speed and agility in individual decision-making and organizational process). Hence, the concept of “time”—as in internal cycle time, time to market, no time to waste, and don’t waste customers’ time—came up several times (no pun intended). We all agreed that businesspeople often don’t pay enough attention to time as a strategic issue and business priority. We should. If shrinking time was given as high a priority as shrinking costs (the first leads to the second, by the way), then execution would be a lot smoother, faster, more innovative, and more cost-effective.

Thursday, April 24. 2008

2008-04-24T18:45:00.000-07:00

In my most recent blogs, I’ve argued that marketing per se is not enough for building a brand. Infusing high-profile marketing onto a bland mediocre product or a me-too service is unlikely to shape a powerful, sustainable brand. I’ve argued that if a vendor offers an exceptional value proposition that creates a special customer experience, then and only then will imaginative marketing (and it’s got to be imaginative) truly serve to strengthen and sustain a brand. Case in point: AND1. If that means nothing to you, then you are not a genuine nitty-gritty basketball freak who sweats and fights for the ball under the net. Here’s the deal: Over the past few years, a tiny enterprise called AND1 muscled past giant Nike in the teen and young adult male basketball attire market with a product/marketing mix that was mindblowing and hard to replicate. AND1 is a privately held company that sells its apparel wares in over 125 countries through retailers like Foot Locker and The Finish Line. The company has grown with double and triple digit rates to around $200 million since three twenty-something basketball fanatics launched it in 1993. The whole vibe of the company and the product line reeks of attitude and basketball. The company cranks out ghetto-designer basketball shoes and related paraphernalia like trash-talking basketball T-shirts and bigger baggier basketball shorts, and it does so specifically for people who love to play a no-holds-barred game in gyms and playgrounds. Its philosophy revolves around its name: "AND 1" You get fouled, you score anyway. AND 1! Two points for the basket AND 1 additional free throw. (If you don't know what AND 1 means then don't wear our gear.) While AND1 has attracted a small stable of NBA endorser-players like Stephon Marbury and Latrell Sprewell over the years (conventional marketing), the high-impact imaginative part of its marketing effort has revolved around its breakthrough streetball tours and videotapes. The company scoured the country for phenomenally athletic and flashy urban street basketball players, putting them together for entertaining competitive tours in packed parks and schoolyards throughout the U.S. The extraordinary threatrics and skills of the 15 hitherto unknown players, all anointed with distinct nicknames, and all African Americans except for one little white dude, were captured and sold in DVD format, often given free with shoe purchases, and presented on a regular ESPN “streetball” series. Of course, the players on the tours and videos wear AND1 clothing and the games are like rock concerts that offer customers ancillary opportunities to purchase AND1 product. The whole deal has been a branding sensation—so much so that there’s even a spinoff video game featuring AND1 streetballers. Thanks to these product and marketing efforts, AND1 has a fanatically loyal customer base and a distinct, trash-talking brand. Jay Gilbert, one of the founders, is clear that AND1 is literally a special brand, which means it’s not for everyone, which means it’s not aimed at a general, diffuse public that just wants to dress “cool.” Neither is it aimed at people who play sports other than basketball. (Check out the company website www.AND1.com and you'll notice that it's all about basketball; only one link seems to be about the products). Talk about a targeted business model! As Gilbert says: "In terms of marketing, our message is first and foremost targeted to the hard-core baller. We make what he needs: shirts, shoes, shorts. The end. Our message is all about performance. If you can't play, don't wear our stuff." Unsurprisingly, they do anyway. So what’s the lesson for the rest of us—you know, we who work in less sexy enterprises like insurance companies and auto parts suppliers? The lesson goes right back to how I began this blog: the best branding occurs when a distinctly imaginative product/service/value proposition is coupled with a distinctly imaginative marketing/promotion effort. Both conditions must exist, and the best leaders are unequivocal in insisting on reaching for both those criteria and continually raising the performance and innovation bar for both criteria. Bottom line: If both conditions exist, your brand will flourish. And if you augment the process with a passion for the products and a love for the “game” you’re playing-- like they do at AND1--your brand will rock. Yes, even if you’re selling insurance and auto parts.

One More Time, Don't Confuse Marketing with Branding

2008-04-16T18:44:00.000-07:00

Some of the comments I got from readers of last week’s blog (http://www.harari.com/blog/index.php?/archives/174-Branding-My-Nikes.html) ranged from “Great stuff, love the P/E idea” to “Hey idiot, what’s your beef against marketing, anyway?” Naturally, I commend the brilliant readers who posted a variation of the first sentiment, but I concede that I might have to be a little clearer to address the concern represented by the second sentiment. Let me repeat my original point: Great branding is a consequence of the reliability, consistency and authenticity of the great, unique stuff (products, services) that the organization provides the marketplace. All the conditions (consistency, authenticity, uniqueness, etc.) have to be present. If they are, the customer is likely to have an exceptional experience, a predictably exceptional experience, that is, an exceptional experience he or she can count on. Once again, if all these conditions exist, then innovative marketing can definitely help build both brand equity and sales volume. If they are not all present, the impact of marketing is often questionable and iffy. Sometimes positive, sometimes irrelevant, sometimes ambiguous. For example, prior to being bought out by Disney in 2006, Pixar’s profit metrics and market buzz were monumentally bigger than those of the much larger animation unit of giant Disney. When Pixar was independent, millions of people were devoted to the company’s films because they could count on having a uniquely delightful movie experience every two to three years, an experience with cutting edge 3D computer technology and a great, original story line with new characters that spawned separate but equal joy appeal for kids and adults. With that underlying reputation of carefully crafted unique value, it’s no surprise that a strong marketing campaign created by Pixar for each upcoming film made a lot of sense, and had a lot of impact. But--had Pixar posted an uneven track record, with occasional good films mixed in with a lot of mediocre ones and a periodic stinker, its marketing campaigns would have generated as much noise as impact. For Toyota, marketing also makes a lot of sense. Millions of people are wedded to buying Toyotas because they can count on having a uniquely positive experience regarding quality, design, innovative technology, fair price, comfort, “feel” and after-sale service. For Toyota, marketing specific exceptional products like the Prius or Tundra spreads the good news about the already-inherent strength of the Toyota brand in addition to the unique feature of the individual products. In contrast, consider Toyota’s Big 3 competitors. Their mega-marketing campaigns—from multiple ads in magazines to intricate product placements in films to sleazy faux Super Bowls with scantily clad models on TV -- sure haven’t helped much, have they? In fact, until last year when Toyota finally entered the world of NASCAR, all of the wildly popular motor sport’s cars were built by GM, Ford or Chrysler. How did that work out for their sales, profitability, and stock value? See what I mean? A few years ago, Goodyear’s $60 million annual ad budget generated some very charming commercials, like the one in which parents in different parts of the world were shown enduring their kids’ whines in native languages of the universal “Are we there yet?” Nice stuff, but the problem was that Goodyear lagged behind competitors like Michelin and Bridgestone in several quality and innovation assessments. Unsurprisingly, while people enjoyed the commercials, they didn’t desert Michelin for Goodyear. The Wall St. Journal reported one Goodyear dealer saying “I didn’t have people coming in and saying, ‘I saw that cute commercial—let me see some of them tires’.” My point is simple: Don’t equate branding with marketing. Equate branding with the consistency, reliability and integrity of the extraordinary things you will do on behalf of your customers. If you have that foundation, a little imaginative marketing will help build the brand. Otherwise--??????One last point. I’m cynical about Disney’s upcoming “Pixar” movie: Toy Story 3. Disney has a track record of bleeding its successful products to death via overexposure in order to max out revenue (remember the three times per week “Who Wants to Be a Millionaire?” on Disney/ABC?) If Disney starts doing Toy Story 4 and 5, or Incredibles 2 and 3, you’ll know that Pixar’s soul is being strangled. And then, the brand will fizzle, and all of Disney’s mega-marketing will be for naught.

Branding My Nikes

2008-04-10T18:44:00.000-07:00

I don’t make it a habit to think of my work when I’m jogging. But on a run through the hills near my home a couple days ago, for some odd reason I began to think about my running shoes and my loyalty to the Nike brand. Confession: All my athletic footwear—running shoes, cross trainers, tennis shoes—has been Nike for several years. I’ll tell you why, because I think there’s an important lesson for branding here. My loyalty to Nike has nothing to do with their ads and promotions. It has everything to do with the fact that I can count on (remember that phrase) Nike to provide me with the following: • a great, snug fit for my size 13 extra-narrow feet. • state-of-the-art innovative, constantly improving cushioning technologies that give a better and better support for my fragile lower back. • a quality and durability that will make those above-two features last for the life of the shoeThat’s basically it. The fact that great athletes endorse Nike is nice. The fact that Nike shoes look cool is nice. I like both those features, I admit it. But other shoe providers boast celebrity endorsements and snazzy looks. And while I enjoyed seeing Rafael Nadal wearing “my” tennis shoes in a recent magazine ad, I’d never buy them just because he gets paid to wear his. (By the way, Marian Salzman, the ex-chief strategist at ad giant Euro RSCG Worldwide, has concluded, “People are becoming far less susceptible to the power of celebrities who are seen as shills for a brand.”)For me and my unique needs, I buy Nike because it does a better job on those three critical variables above than any other competitor shoe I have ever tried. I can count on Nike to provide me with ongoing success on those variables, so much so that I am 100% confident of ordering product on-line (which I rarely do with other clothing retailers) and will pay whatever the asking price is. What makes brands great is not their visibility, nor their celebrity endorsements, nor the marketing pizzazz behind them. Remember, during the 1990’s Nike and McDonald’s lost a lot of their sheen (and stock value), despite their heavy promotional strategies and the ubiquity (and near 100% recognizability) of the swoosh and the Golden Arches. Only when both companies revamped their product lines did the swoosh and arches generate a positive halo. Don’t mistake presence and recognizability for corporate vitality. Nowadays, Levi Strauss and Coke are struggling, and as I’ve explained elsewhere (see http://www.ftpress.com/articles/article.aspx?p=1180989), Starbucks' buzz and market cap have fallen—but everybody recognizes the brands. Regardless of whether you’re in the business-to-consumer or business-to-business space, a vendor’s brand flourishes when customers can trust the vendor to provide them with a special experience and constantly evolving great products. With that excellent foundation, judicious imaginative marketing can certainly fan the flames of exposure (think Toyota and Pixar, for example) , but on its own, marketing does not make a great profitable growing brand. (And think about the fact that there are many companies, like Google and retailer Zara and tube fitting manufacturer Swagelok, which build a healthy brand solely around their unique value proposition and do practically no conventional advertising). Tom Peters says that a brand “is a promise of the value you’ll receive.” In that spirit, I sometimes urge my clients to think about a new “P/E multiple”, one that supplements the traditional “price/earnings” metric. Think about a “Promise/Experience” metric. If, in effect, you can implicitly (not via sexy ads, but in the way you run your business) promise the marketplace that you will churn out a cool, special value in products and services-- and then actually deliver it in a way that generates a really desirable experience for the customer--the payoff in customer and investor loyalty is a genuine multiple. That’s what they do at Toyota, Pixar, Google, Zara and Swagelok, among many others. Put simply, the way to build a break-from-the-pack brand is not by public relations campaigns, ad rollouts, logos, color schemes, viral marketing, etc. etc. Those can definitely help if you’ve got the basics down. And what are the basics? The capacity to demonstrate to the marketplace that your organization will consistently, reliably, efficiently, authentically, and quickly deliver on great things that are implicitly promised in your business model. Retired Atlanticare CEO George Lynn used to tell me that from his perspective as a hospital CEO or an individual customer—the value of any organization he buys from must be “pervasive, relevant, and credible.” Once again, it all boils down to this: Can I count on this vendor to provide me with special value that truly matters to me? For me and my feet, it's Nike. What about you?

Real Illusions

2008-04-03T18:43:00.000-07:00

Jerry Flint writes a regular column on cars for Forbes magazine. In his April 7 piece, he castigates Chrysler (now owned by private equity firm Cerberus) for its “global illusions.” I think he’s right for the right reasons, and those right reasons have some important implications for leaders in any industry. Basically, Flint’s point is that if Chrysler can’t find customers in the U.S., what makes it think that it can find customers abroad? Despite ruinous price cuts and incentives (all of which depress margins, cash flow, and product buzz), Chrysler’s U.S. sales fell 3% in 2007 to drop market share to 13%. Don’t count on a wave of cool new products in the pipeline, either. As Flint observes, Chrysler is “killing more vehicles than it’s bringing out.” So once again: If American auto buyers aren’t itching to buy Chrysler cars, why would buyers abroad be? Especially since only two of Chrysler's models made the Consumer Reports list of recommended models for 2008. Especially since four of its models rank in the bottom ten of Consumer Reports worst cars for 2008. So, throwing in more of my two bits, here’s the lesson for all you leaders. Yes, we operate in a truly global economy. And yes, looking beyond one’s borders for new sales opportunities is in many cases a competitive must. But no, don’t look at “going international” for sales boosts as some magic bullet for your “non-international” corporate woes. If your domestic product/service mix is unexciting or flawed, or if your domestic business model is yielding uninspired margins, earnings and stock values, then going global might boost your top line, but it won’t do anything to enhance the kinds of returns on investment that make a difference to stockholders. On top of that, remember that going global requires some serious investment in product enhancement, systems integration, human resource development, logistics, marketing, relationship management, and such. Hence, the happy dream of fat international sales can become an expensive nightmare—unless you’ve got both a solid, compelling base here at home, and the capacity to adapt and customize that solid, compelling base to other countries.

Car Talk Meets IAC

2008-03-24T18:42:00.000-07:00

There’s a popular weekend show on National Public Radio called “Car Talk.” The two hosts (the very knowledgeable and funny Maggliozzi brothers) act as car docs, answering people’s questions on odd, nagging, maddening auto problems. One of the periodic features of the program is called “Stump the Chumps.” In this segment, someone who had asked the hosts a question in a prior show is brought back to tell them whether their analysis and advice had been accurate. I listen to the show only sporadically, but in my experience the hosts have been correct 100% of the time. I thought about “Stump the Chumps” when I read some reports that Barry Diller is trying to break up the conglomerate mish-mosh called IAC/InterActiveCorp—the very mish-mosh he has so assiduously put together over the past few years. IAC is a bewildering array of online sites—you know many of them: Expedia, LendingTree, Match.com, Ticketmaster, to name just a few. Two years ago, I predicted that the “synergy” that CEO Diller was touting was basically bogus. On their own, I conceded that some, maybe several, maybe even many of these companies might perform well at the operating level—if they operated as fully independent firms. But in tandem, I argued that they provided no compelling additional composite value. On the contrary, I predicted that the unfocused, practically nonexistent corporate mission of IAC (I don’t consider “synergy” a mission) and the inevitable corporate bureaucracy that would emerge would actually diminish the value that these companies could potentially offer on their own. I documented some of my thoughts in my April 4, 2005 blog “A Synergy Fantasy”—see http://www.harari.com/blog/index.php?/archives/10-A-Synergy-Fantasy.html. I urge you to read it. I think you’ll find it both amusing and informative.My knowledge of company ailments is nowhere near as good as Tom and Ray Maggliozzi’s knowledge of car ailments—but if I was playing Stump the Chump about my 2005 IAC analysis, I’d have hit the bulls eye. Consider a couple extracts from a March 16, 2008 New York Times feature on the company: • “At it’s core, it is a mergers-and-acquisitions deal shop”, said one executive at the company who requested anonymity…. “IAC does not have a mission as to why you want to be all together. Its mission is nothing more than doing what is interesting to Barry.”• “If you listened to (Diller) the months before, this is a great ball of wax,” said Mr. Vogel, the media analyst. “If it was so great six months ago, how come we are breaking it up? IAC does not seem to have any strategy. You would need a playbook to figure out what was bought and what was sold and what were the gains and what were the losses.” • In testimony last week, John Malone (IAC’s largest shareholder) said IAC’s results “have lagged seriously behind Nasdaq and other indexes”.I predicted it all, but I’m no genius. It’s fairly easy to predict that companies built primarily via serial acquisition (despite their executives’ lame rationalizations of “scale, scope and synergies”) will, like Wile E. Coyote, eventually accelerate towards a cliff drop off. I remember back in 2004, Cendant (a megamix of real estate services, car rentals, hotels, mortgage brokerage, time-share, truck leasing, and more) was crawling back from some near death experiences. At the time, CFO Ronald Nelson (today the company’s CEO) told Investors Business Daily: “The market viewed us as serial acquirers who couldn’t shake the narcotic of growing by acquisition. We had to convince the market we were adamant about our strategy to improve transparency, buy back stock, make no acquisitions, and provide organic growth.” Don’t get me wrong; I’m not suggesting that M & A is a no-no. Strong successful companies are always on the prowl for judicious acquisitions. But as an investor, you’d be wise to avoid those companies whose growth depends primarily on pasting together a collage of acquisitions. That’s true even if you’ve got rock star leaders like Barry Diller and John Malone at the helm. You know, I'm thinking about calling Car Talk to tell the Maggliozzi brothers that they inspired my latest critique of IAC, but I suspect they probably wouldn’t know what the hell I’m talking about—or care! Check out the show.

Dear Frank

2008-03-13T18:41:00.000-07:00

Here we go again. Every once in a while I have to stop ranting about bland myopic strategies, insipid change efforts, and dully conventional leadership styles in order to get right to the core: How your company treats your customers is a superb predictor of how successful your company will be. Ron Havner, CEO of Public Storage, the largest self-storage company and REIT in the U.S., tells me succinctly: “The next frontier in our business is the customer’s experience.” That is why I was delighted to get a copy of a letter (not an e-mail, but a real letter!) that Phil Green sent to Frank Blake, the CEO of Home Depot. Phil is a regional sales manager for Pioneer Mobile Electronics. Phil had heard me deliver a speech to Pioneer distributors a couple months prior, and he knew I’d be interested in the experience he had with Home Depot. His experience (remember Ron Havner’s comment) no doubt helps explain why a healthy Lowe’s has taken so much business from a wounded Home Depot, despite the latter’s high-profile initiatives in mega-technologies, massive re-organizations, capital infusions, Six Sigma trainings, rock star CEO’s (remember Bob Nardelli?) and so on. Phil’s problem was utterly mundane. He had purchased a Ruby-red Eljer toilet at a Home Depot a few years prior. Now the toilet’s base was leaking, and he wanted to replace it. He wanted a Ruby color in order to match the toilet color itself, as well as matching the Ruby colors of the refrigerator and sink that he had also purchased from the same location. So Phil cheerfully and naively went back to the Home Depot where he had bought all these appliances, and from then on, his “experience” basically sucked. First of all, the response he received from store personnel was that it was no longer possible to get the color desired for the base, even though that store had sold him the original unit. Phil said he would be willing to buy the entire unit (list price $481.90) just to get the base color. Again, no luck. He was persistent because he had seen the toilet color on websites, but the supervisor at Home Depot was, to quote Phil, “…not very involved, and not too helpful. His attitude bordered on condescending.” The supervisor eventually, grudgingly, agreed to pursue the matter and get back to his customer. Of course, Phil didn’t get a call. He left messages on the supervisor’s voice mail, and when he called the main switchboard of the store, and was put on “hold” (a.k.a. phone hell) indefinitely. Now let me quote directly from Phil’s “Dear Frank” letter to CEO Blake: “I went back to the Eljer website, and found out that Lowes also sells Eljer. Guess what? I was able to call Lowe's, and speak to a real person in the plumbing dept. He checked on the Eljer Toilet in Ruby, and called me back in 5 minutes, and said ‘we can get it.’ By then, I had discovered the Eljer part number for just the base and asked Lowe's if they could get only the base. 5 minutes later, my new Lowe's buddy called back, and said they could. The cost? $162.37. ‘By the way’, said the Lowes salesman when I visited the store to order up, ‘would you like the base delivered to your home at no additional cost?’ I thought I had died and gone to heaven.” There it is: an utterly mundane story that is completely un-sexy to typical CEO’s and MBA graduates. Too bad, because Phil Green tells me that he and his wife plan both a complete kitchen remodel and an addition of a front porch. “Lowe's will figure prominently in our plans”, he assures me. “Home Depot will not.” There are no villains in this little story. The Home Depot people were not mean or evil. It’s just that customer care is a strategic priority at Lowe's, and the appropriate steps, decisions and responses that impact customers positively have been institutionalized at Lowe's. As many reports have noted, this is not currently the case at Home Depot—which is why Phil Green’s experience was tarnished. If I were Frank Blake—or for that matter, any CEO in any company—and I received a letter like that, I’d go nuts. I’d realize that there must be oodles of unhappy Phil Greens, and their unhappiness is like a fire alarm—indicating that a big problem in the organization needs to be addressed right away. I’d drop everything and work urgently with my people to figure out what needs to be done to authentically prioritize customer care throughout the company and effectively institutionalize the kinds of systems, processes, cultures

Poor Goliath Seeks a Bride

2008-02-25T18:57:00.000-08:00

Before we get to the marriage, what’s this “poor Goliath” nonsense anyway? Why should we feel any sympathy for Goliath, in this case Microsoft? Microsoft is a colossus: In 4th quarter 2007 alone, revenues were up 30% to $16.4 billion, operating income was up 87% to $6.5 billion, and Earnings Per Share (EPS) were up 92% to $0.50 per share. That sounds great, except for one thing.Goliath is trapped in the past. Microsoft’s financials are almost entirely due to its near monopoly status in the Windows operating system and Office suites. Despite its never ending public relations campaigns about its focus on “innovation”, and despite its multi-billion dollar annual R & D budget, the fact remains that the company's new breakthroughs in cool stuff—be it in music, social networking, video, games, search, advertising, or whatever—have been almost nonexistent. It’s all been imitative, from Zune to Xbox. That’s why the stock has flattened. Even worse, everything in computing is moving to the Web, threatening the very foundation of Windows and Office. That’s why Microsoft proposed marriage to a reluctant Yahoo. And that’s why I feel sorry for Goliath. I feel bad for any forced, desperation shotgun marriage that’s likely doomed from the outset. Forget the questionable merits of a $46 billion offer which will be no doubt be upped since Yahoo rejected the initial deal. Forget the “$1 billion savings in operational efficiencies”, a rationale used in every mega-merger that has turned out to be a bust. The real issue is this: Online search is a big driver of this marriage, but both companies are ailing and struggling in search. Microsoft has a 2.9% share, Yahoo a 12.8% share. Compare that to David, a.k.a. Google, which has a 64% share and, more importantly, continues to pull ahead with innovations in targeted and display advertising. So why should a marriage of second-raters who couldn’t do it on their own cause investors (and talented employees) to cheer?Second, keep in mind that Google’s targeted ads are the category killer, where buyers pay only if users click on their ads. Yahoo and Microsoft are heavy into display ads, which are becoming less relevant to both advertisers and users. Further, emerging companies are popping up which put together “ad networks”; they stitch together ad space on thousands of Web sites that collectively reach millions of users—all at a cheaper price than Yahoo’s or Microsoft’s. Third, think about the “soft” but deadly stuff: The difficulty and the distractions in integrating two very different companies, the ongoing cultural clashes, and the probabilities that the best and brightest talent will walk across the street to Google headquarters. Especially in a hostile acquisition like this one.True, the new company will be bigger, but bigness per se is no predictor of competitive success. The new company will take the lead in web based (but mostly free) e-mails. It will “own” the biggest directory of registered internet users—which is good for users and advertisers if you’re providing them with something that’s unique and exciting, but otherwise it’s just a list. Steve Ballmer is probably a lot smarter than me; he’s certainly a lot richer. So maybe he knows something I don’t. But in my book Break From the Pack, I describe many failed mergers that were headed by brilliant people hanging on to eloquent (but ultimately flawed) logic. The bottom line is that there is no wave of compelling new technology, talent, agility, foresight or vision that will emerge from this union. On the contrary, I fear the marriage will further lock Microsoft into the past, at a very big price. In this case, my sympathies are with Goliath.

The Simplest Management Basics

2008-01-25T18:55:00.000-08:00

Last week I phoned Tom Forster, one of the executives who runs Skywalker Properties for the Lucasfilm company. I hadn’t spoken to Tom for ten years, and now that one of my pre-teens is a Star Wars fanatic, I was delighted to locate Tom from an old business card. As we made plans to revisit, he mentioned that he still keeps some of my ancient, 1990’s magazine columns around. Despite the convulsive changes in both the entertainment and real estate businesses over the past decade—he straddles both—he told me that in one article in particular, a few simple points I raised remain so germane that he still shares them with colleagues.I was intrigued. What could I have written that was so prescient and inspiring way back in the early 1990’s? Well, Tom sent me a document in which he had condensed my article into a kind of “executive summary”, and as I read it, my reaction was: “Oh, so simple, so innocent, yet so damnably difficult to execute.” I had written about why groups (teams, functions, business units, etc.) are often dysfunctional in morale and suboptimal in performance. Here is how Tom so ably summarized my comments: Four Most Common Causes of Group Problems1. Insufficient clarity and consistency among top management regarding the organization philosophy, mission, direction, and strategy. Employees are unclear as to what the organization stands for, strives for, or prioritizes. Ambiguity and inconsistency regarding these key issues lead to lower morale and teamwork, inconsistent and contradictory actions, delays or avoidance in problem solving, and a lack of common focus in decision-making. 2. Insufficient coaching and performance feedback by top management. This should involve training, teaching, and developing. This needs to be done in person by a member of senior management vs. through a memo, e-mail, etc.3. Insufficient recognition, reward, and celebration for individual and team performance. The spirit, enthusiasm, sincerity, and frequency of rewards are more important than the actual thing that is being given. Problems develop when employees are not rewarded for high performance (quality, service, goal attainment), nor are they rewarded for loyalty, personal initiative, or innovation. The rewards and recognition MUST be linked to desired criteria like high performance, loyalty, initiative, and innovation. If not, the resulting ambiguity, inconsistency, and a sense of cynicism as to what the organization stands for will result. Also, management will be perceived as "not walking the talk."4. Insufficient sense among employees of being part of an organization wide team. This is usually evidenced by any "us vs. them" feelings or behaviors. It can be overcome through organization wide communication, recognition, and celebration.You’d think that by now we’d have all this stuff solved. But we know that’s not the case. As we leaders frenetically obsess about “big things” like investor relations, global market penetration, technology transfer, supply chain management, and creative M & A, we’d be wise to revisit these few simple management basics from time to time.

Me, My Wife, and Howard Schultz

2008-01-16T18:55:00.000-08:00

Starbucks chairman Howard Schultz is returning to his old CEO job after firing Jim Donald. I think that’s a good thing. Margins are being squeezed, the stock is down, and same-store sales have suffered. One reason is that my wife and I stopped going to our local Starbucks. It used to be a cool place, or should I say, a warm, inviting place. It was a place that beckoned us with easy familiarity, a place we could hang out in comfort. No longer. The couches and sofa have been removed. A few small tables and wooden chairs remain, pushed to the edges of the room. The baristas no longer seem to know the customers. The whole vibe of the place reeks “fast food”. Get people in, pump them for multiple sales, take their order, get ‘em out. This is not an isolated situation. It’s a predictable consequence of Starbucks’ strategic obsession over the past few years—which has been all about unbridled growth. Launch more stores in more places, full speed ahead! Four new stores per day in 2007, as it turned out, with an intermediate goal of 40,000 stores (from the current 15,000) worldwide I’m all in favor of growth as a strategic priority, but when it becomes the strategic obsession, there’s a real danger that a company will lose its distinction and its soul. That’s what happened to Starbucks. First, a little history. As numerous business and management books have noted ad nauseum, the remarkable success of Starbucks was its capacity to pump compelling value into what used to be a high volume low margin commodity “coffee” industry. That value, of course, revolved around the unique experience that Starbucks offered the customer: a diverse menu of high-end global coffees and a comfortable friendly environment that served as a refuge from the woes of the external world.The trouble is, the experience became less and less unique as an increasing number of providers—from Dunkin’ Donuts and McDonald’s to ma-and-pa enterprises—began to offer their own versions of designer coffee and comfort. When a McDonald’s spokesperson recently declared that high-end coffee has become “democratized”, you know that what was once a unique value proposition has become commoditized. Meanwhile, as part of its growth zeal, Starbucks itself accelerated the commoditization process. The strategic decisions revolved around leveraging a static Starbucks experience to an ever increasing number of locations in order to increase volume, revenue, and share. If the best people weren’t hired or properly trained, and if the furniture and amenities weren’t revitalized—so be it. Size and scale ruled. You can’t have it both ways. You can’t demand that your people and culture obsess about corporate growth as “the” top priority and at the same time expect them to continually enrich the customer experience in order to maintain the sense of uniqueness and “gotta-have-it”. It won’t happen.Schultz himself recognized this. A year ago, he wrote a controversial memo to staff that bemoaned the increasing “dilution of the experience” and the “commoditization of the brand” as adverse consequences of Starbucks’ growth imperative. He should have stepped in back then as CEO, rather than simply fretting, because today the chickens have come home to roost. Starbucks has become a big, “mature” company with declining differentiation, buzz and market cap. My wife and I go to a funky local “coffee shop” around the corner to get our espresso fix, and a BloggingStocks.com entry concludes that Starbucks “will never be cool again.” Maybe, maybe not. Schultz is following the precedent set by Michael Dell and Charles Schwab, both of whom founded companies which thrived, both of whom left the companies to others while assuming the non-operating “Chairman” role, and both of whom returned to their CEO roles when the doo-doo hit the fan. Schultz is obviously hoping that he can help Starbucks find the soul it has lost. As a woo-able customer, and as a long-term investor, I selfishly wish him well.

The Real Essence of Strategy

2008-01-07T18:51:00.000-08:00

As I sit here pounding on a battery-powered laptop while a storm which has knocked power out of my office and home rages outdoors…..I want to wish you a happy new year and I hope you’re warmer than I am right now!! I just read an article by strategy guru Michael Porter in the Harvard Business Review. As usual, Porter’s thoughts on strategy are incisive, and his detailed nuts-and-bolts analysis of competitive forces are useful. Yet, as I’ve noted in the past, conventional approaches to strategy have some significant limitations. It’s not merely that they’re too linear and mechanical (the world often doesn’t align itself to the logical premises and categorizations of planners). It’s also that they miss the essence of what a successful strategy is all about. Porter’s very first sentence is the giveaway: “In essence, the job of the strategist is to understand and cope with competition.” Respectfully, I say: No it isn’t. Of course leaders must understand and cope with competition. That’s a given for corporate survival. But when an organization’s strategy revolves around its competition, you can bet that the strategy will be more defensive and reactive than groundbreaking—and thus limited in scope and impact. You can bet that innovations will revolve primarily around imitation (“me-too” products) and incrementalism (“hopefully a little better than what our competitors are doing”), neither of which yields sustainable competitive advantage. Think about it. Back in the 1960’s, American tire companies—all bias-ply producers—concentrated so much on one-upping each other that they were blindsided by the powerful left hook coming from Michelin and its radials. Kodak concentrated so much on its jousting with known competitors like Fuji that it failed to see and exploit the opportunities in digital media. United Airlines actually “beat” Eastern and Pan Am before plunging into bankruptcy as the economics of the airline business changed and radically different business models from Southwest Air and Jet Blue changed the rules of the industry. Once again, I agree that leaders must constantly survey competitors in order to fully understand and cope with them. But unlike Porter, I would argue that in essence, the job of the strategist is to go to a place beyond competition. I would argue that the job of the strategist is to mobilize the organization to achieve something special, great, and unexpected in the marketplace so as to create new, compelling, and significant value for customers—and thereby for investors. That raises the bar significantly, doesn’t it? But isn’t that what market leadership and sustained competitive advantage is all about? After all, when John Mackey launched Whole Foods Market, he certainly had to be knowledgeable about the business practices of competitors—from giant grocery retailers like Albertsons and Kroger to small corner shops like 7-11 and Harry’s Deli. He certainly had to understand competitor-driven forces like capital requirements, customer switching costs, potential retaliation from entrenched players, supplier power, pricing impact, and such. And he certainly had to (still has to) continually monitor the moves of other food retailers. But at the end of the day, Mackey’s strategic purpose was not to understand his competitors, cope with them, or even to “beat” them. His purpose was to provide customers a radically new and desirable alternative in the form of natural, organic foods. His purpose was to create an exciting and lucrative market. That, in turn, is why Whole Foods busted the competitive landscape and transcended its competitors while becoming the fastest growing, highest-margin food retailer in the industry. Without a doubt, understanding and coping with competitors is a vital part of competitive strategy. But never forget that the soul of a winning strategy revolves around the pathbreaking value that your organization can create, regardless of what competitors are doing. That’s what excites customers, turns on employees, and brings investors rushing in.

2007-09-24T17:34:00.001-07:00

Luck and Agility

2007-09-21T17:48:00.000-07:00

Bear with me, here’s a little chronology: • 1953: Rupert Murdoch takes control of the Adelaide, Australia newspaper company News Limited. • 1953-1964: Murdoch expands his holdings by buying a slew of suburban and provincial newspapers throughout Australia, culminating with the launch of The Australian (a USA Today type of national paper) in 1964. • 1968-1969: Buys The Sun and The Daily Telegraph in Great Britian.• 1973, 1976: Buys his first two U.S. papers, the San Antonia Express-News and the New York Post. (He had to sell the Post in 1988 because of cross-media ownership laws, but bought it back in 1993).• 1981: Buys the London Times and The Sunday Times. • 1985: Buys 20th Century Fox with its slew of regional TV stations which he eventually builds into the Fox network.• 1987, 1989: Buys book publishers Harper & Row, then Collins, then merges the two to HarperCollins• 1989: Forms BSkyB satellite TV. • 1993: Buys Star TV in Asia.• 1996: Launches Fox News Channel in the U.S.• 2005: Buys MySpace.• 2007: Buys The Wall St. Journal.This is an abbreviated chronology, believe it or not. And, believe it or not, unlike most serial acquirers, Murdoch has consistently created shareholder value rather than destroyed it. So the burning question is this: How does he do it? Through genius? Through brilliant strategic planning? Through some sort of cosmic intervention? Maybe, but Murdoch himself recently attributed his success to two factors: Luck and agility. There’s something for us to learn here. First of all, the reality is that luck and serendipity do play a tangible role in business success. In my experience, I’ve found that arrogant self-absorbed leaders deny the impact of luck, attributing their success almost entirely to their own brilliance, fabulous leadership and uber-prescience. Leaders who combine confidence with humility admit that the good fortune of being in the right place at the right time always deserves some credit. Jim Collins demonstrated the importance of leadership humility in Good to Great. I agree. You're better off placing your bet with the humble leader than with the blowhard. The agility factor is even more important. In my 20 years of researching this topic, I’ve found that the best organizations are not necessarily the best at planning, but the best at quickly taking advantage of the fleeting opportunities that periodically appear in the horizon of the marketplace. Troubled organizations focus their resources on getting good at analyzing and planning. Successful organizations focus their resources on getting agile and fast. Good strategic planning is important, to be sure. You need to have a clear sense of your direction and priorities. But as the great general von Clausewitz noted: “No battle plan survives first contact with the enemy.” The competitive terrain shifts and convulses regularly. That’s why, consistent with Murdoch’s view, the best companies focus on staying light and nimble. I call it “strategy on the run.” As I wrote in Break From the Pack: “The winners…are companies whose people are always scanning the environment and horizon for opportunities and agilely capitalizing on them, then quickly generating action plans, racing to execute them, and ultimately redefining themselves in line with changing market realities.” I’m certain that thorough due diligence, vetting and oversight preceded every one of Murdoch’s acquisitions, and I’m also certain that they were conducted with a sense of healthy urgency and speed. For the leader, the lesson from Murdoch’s career is not “let’s do a binge of acquisitions”. The lesson is “let’s humbly respect the power of luck, and let’s concentrate on getting agile so that we can take rapid-response advantage of any opportunity—acquisition, market niche, technology, partnership, potential hire, or anything else that can help us create genuine value.”
Posted by Oren Harari at 12:26

The Value of Wearing Customer Glasses

2007-09-14T17:46:00.000-07:00

In my September 7 blog, I noted the intimate connections between innovation, customers, execution, and profitability. I also suggested that while each of these issues is vital for organizational health and performance, a leader would be very wise to put the customer first and foremost. To illustrate this point further, I want to share with you a story about Jim McNerny’s early days at Boeing. In June, 2005, Boeing named McNerny as its new CEO. McNerny had enjoyed an impressive run as CEO of 3M, and upon his appointment he prepared to transform a financially and ethically troubled corporation that was getting competitively trounced by Airbus. Today, of course, the tables have been turned, and Boeing’s slim 787 Dreamliner is kicking some serious aerospace butt, while Airbus’s fortunes have seriously declined in the wake of the company’s disastrous forays into the monstrous 600-seat 380 jet. There are many reasons for this reversal of fortune (and to be sure, hideous Airbus execution in operations is one big culprit). But I submit that one of the main reasons is that McNerny got Boeing executives to take off their traditional “engineer” and “manufacturer” eyeglasses and replace them with “customer” eyeglasses—to view the world differently, and react accordingly. One story will demonstrate what I mean. In one of McNerny’s early senior meetings, he asked the executives to explain the value and benefits of the 787’s new composite technology. The chief technology and engineering people put together a nice Power Point on factors like fatigue life, corrosion, and such,. The manufacturing and financial people put together a nice Power Point on factors like operational and cost efficiencies and such. And McNerny responded in a bizarre way. He said, in effect, that he was aware of all those benefits, but they all were benefits for Boeing. His question was different. What he had meant was: How does the new composite technology benefit Boeing’s customers, in this case the airlines? As you can imagine, the reaction in the room was slack jaws and a “hmmm…”. But McNerny was not engaging in word play. He was trying to get Boeing's leaders to view the world from the customers’ perspectives, and act accordingly. If the composite technology would have lasting business value, the value should be reflected primarily on behalf of Boeing’s customers, and if it was, then Boeing would benefit with the kinds of customer loyalty, market share, profit margins, and sustained growth that truly delight investors. In fact, it turns out that the composite technology would very much benefit aircraft customers by significantly lowering their maintenance and fuel costs, providing them with much greater flexibility in their routing, increasing their speed to destination, and so on. Unsurprisingly, once all this sank in, Boeing people raced to develop even more customer-pleasing features into the product. McNerny’s lesson was very important in beginning the process of culture change within Boeing. He wasn’t telling the group that this was a marketing problem, a la “well, do what you’ve always done; just change your public message to something that the public will swallow”. No, he was trying to set up a new framework for decision making. His message was: You—you executives--think about your customers from the very beginning, start by truly understanding their needs, and only then build your products and organization around that knowledge. Sure, you must do everything with excellence and innovation in engineering, operations and finance, but weave everything you do around the spoken and unspoken needs of your customers. That’s where value and benefit have lasting competitive impact.It's a good lesson for all of us. We love to talk about the notion of the customer as king or queen, but are we ready to build and rebuild and rebuild and rebuild our business around their continuously evolving needs and demands?

They’re All Important!

2007-09-07T17:45:00.000-07:00

I just finished leading a seminar for a hundred-some CEO’s in Perth, Australia. In a four hour seminar, sometimes issues that were discussed at the beginning get conceptually separated from the issues that are discussed at the end. For example, one of the questions I received at the end of the seminar was an interesting one. It went something like this: “You’ve spent a lot of time talking about the importance of executing and monetizing our strategies. Are those issues more important than the issues that you talked about earlier, like innovation and customer care?"My quick answer to that gentleman: No and double no! All are important, and all are intimately intertwined. For one thing, it makes no sense to discuss innovation without talking about whether the innovation matters to customers, matters enough that they will be excited, engaged, and willing to pay for it. If your initiative doesn’t matter to them, then it simply doesn’t matter, period. GE CEO Jeff Immelt has stated that one can no longer even discuss meaningful innovation without discussing and documenting a positive reaction from the customer. But likewise, the coolest ideas about how to serve customers innovatively mean nothing if the organization cannot efficiently translate those insights into profitable action. If your execution stinks, or if you can’t demonstrate how your actions will yield a profitable return on investment, then all you’ve got is a cool idea that you can pontificate about in a pub.. So you see, they're all important. But if you back me against the wall on which element is really and truly the "most" important, remember Peter Drucker’s dictum that the sole purpose of any business organization is to create and grow customers. So if you’re a leader, start with the customer. That’s your foundation. Then obsessively work with your team to figure out how to continually innovate on behalf of the customer—and don't forget to consider tomorrow’s customer, not just today’s. And in the same breath, consider how you as a leader plan to direct--and inspire-- your organization to continually deliver and implement those great ideas in a way that unambiguously yields the kind of high margin financials that reflect healthy growth. That may sound obvious, but in real life, customers are not the starting point and fountainhead in many organizations. Other constituencies or priorities are. Another problem is that when it comes to these four issues of innovation, customers, execution, and profitability, too many organizations compartmentalize responsibilities: for example, one department focuses on innovation, another on customers, another on execution, and another on "the numbers" like profit. Likewise, many leaders themselves focus their attention on the areas that turn them on, and pass off the elements that don’t interest them to others. Wrong! Some functional specialization is inevitable, but in the best organizations, every group and function considers the four issues as an inherent part of their charge. Likewise, each leader considers these four issues as a critical part of his or her responsibilities—regardless of role or rank. So yes, in that particular seminar in Perth, I did spend quite a bit of time on innovation, customers, execution and monetization. Why? Because they’re all important. And they’re all connected when it comes to market leadership and competitive advantage.

Your Business as Fashion

2007-08-31T17:44:00.000-07:00

Last week I was interviewed in Sydney by the Australian Financial Review BOSS magazine.. One of the issues that interviewer Brad Hatch and I discussed was the fact that many leaders talk a good game about innovation, but in practice they do little to walk their talk. How can this problem be ameliorated? I pointed out that executives might do themselves a big favor by imagining their businesses as “fashion” businesses. I’m serious. Stay with me for a moment. The basic premises that any successful competitor in the fashion industry must hold are these: 1. Nothing lasts (including our products, even if they’re current hits; competition is relentless)2. Nothing is supposed to last (we don’t expect long product life cycles; that’s the reality in business today)3. It’s good that nothing lasts (because if it did last, we—i.e. everyone in the business—would copy each other blatantly and we’d all look the same and we’d all become complacent and we’d all lose our customers’ interest and our margins would go to hell)4. We’re making darn sure that nothing lasts (we’re always obsessively putting our time and talent into creating the next wave of new exciting products in order to build our brand, our market share and our income stream)Couldn't those four premises apply to your business? I would argue that whether you sell cosmetics, clothing, insurance, auto parts, telecom services, or whatever—thinking of your business as a “fashion” business is a very good practice. And let me reassure you, to be successful in the fashion business, you have to be scrupulously disciplined as well as continuously creative. Recently, the Australian Financial Review magazine also interviewed Yves Carcelle, the President of Louis Vuitton. As I’ve pointed out in my last book, Louis Vuitton is a remarkably profitable luxury products engine; the Review’s estimate is an impressive 45%, which means that while Louis Vuitton generates less than 20% of the sales of LVMH (the corporation it’s part of), it generates more than 60% of its profit. Here’s what Carcelle told the Review: “When you are in a business where creativity is key (my comment: and which business isn’t?) the process is very irrational at the beginning but if you don’t trust the people with the gut feelings—if you put in too many constraints—then you don’t get that creativity. But then you have to apply the principles of reality and profitability. I call it the ‘rationalised irrational’, the balance between being too logical—in which case, where’s the dream?—against being too dreamy, in which case, where’s the physicality of that dream and the profits?” Think about it. Couldn’t you do some wonderful things in your business if you approached it as a fashion business?

Neptune Rules the Seas--Unfairly

2007-08-23T17:43:00.000-07:00

In my August 3 blog, I wrote about the concept of “unfair” competitive advantage. Unfair competitive advantage occurs when a company can creatively develop, scrupulously monetize, and efficiently execute a product or service that significantly deviates from standard industry practice and truly matters to customers. I’m still in Australia, so it seems fitting that I choose an Aussie company to illustrate.Neptune Marine Services, based in the wild west coast city of Perth, provides engineering, maintenance and diving services in a wide variety of dredging, offshore and maritime markets. What gives Neptune a potentially huge unfair advantage are two things: First and foremost, the company has developed a proprietary and patented technology that not only breaks new ground, but actually changes the rules of the game—in this case, for underwater dry welding. This technology has potentially huge implications for businesses like oil rigging, underwater pipelines and shipping. Traditionally, if a big oil rig needs repairs, there are only two alternatives. The first is an emergency underwater wet weld. But because of moisture and salt, this is a band-aid measure that generally lasts for a few weeks at most. The second alternative is the time consuming and expensive dry dock weld. But Neptune’s new technology allows the welding to be done on site, underwater, while the rig is still operating, and the results are equivalent to a dry dock weld. Exclaims one analyst: “The potential is absolutely enormous and (Neptune) is only starting to scratch the surface.” In addition to this critical new technology, Neptune has done one other “unfair” thing: The company has taken its discrete (and increasingly commoditized) services like engineering, inspection, repair and maintenance and transformed them into a fully integrated value package of services that can be quickly customized for each individual customer—so much so that Neptune’s customers are now seeing value in outsourcing an entire set of all these activities (which traditionally have been kept in-house) right to Neptune. Small wonder that revenues of only $1.5 million in 2006 are expected to balloon to $27 million in 2007 and $70 million in 2008. One analyst reckons its 2008 price/earnings multiple will exceed 14, and that’s a conservative figure. The rewards of unfair advantage are rich. One last point. Every time one of my clients says “Well, it’s only the big, deep-pocketed companies that can do this stuff”, I wind up pointing to the research which says the opposite: that large, entrenched companies must continuously fight the dangers of complacency, rigidity, risk-aversion, and protection of the past, because very often, it’s the small, underfunded lunatic companies which lead the way, and then grow exponentially as a result. It’s easy to point to companies like Google and Whole Foods Market as exemplars, but out here in Australia, Neptune also makes the case.

A Little Break

2007-08-10T17:42:00.000-07:00

Those of you who follow my blog might be interested to know that over the past few years I've posted it from places around the world (amazing what the equation "globalization x technology" can do for communication). Sometimes I've been at work, sometimes on holiday. From reading my last blog, you know I'm in Australia right now. I'm heading into the Outback with my family, and frankly, the Outback is not particularly condusive to thoughtful ruminations about business and society. So with your permission, I'll sign off for a couple weeks and recharge my own batteries, as I hope you are recharging yours.

Unfair Competitive Advantage

2007-08-03T17:41:00.000-07:00

I'm in Australia, where the big political news is about whether Dr. Mohamed Haneef (who practiced in Brisbane) was really connected to the other MD terrorists in England (personally, I think he's dirty, but there are many who disagree), and the big business news is former-Aussie-now-American-citizen Rupert Murdoch's purchase of The Wall St. Journal. I learned about the latter event at breakfast a couple days ago while reading The Australian--another Murdoch property, while simultaneously viewing the bridge collapse horror in Minneapolis on Sky TV--another Murdoch property. Hmmm....The other day, The Sydney Morning Herald cited three predictors of companies which make shareholders happy, and I think they are worth repeating here: 1. They operate in a large and growing market.2. They have an unfair competitive advantage.3. They have the business model needed to turn the first two criteria into sales and profits. Let me tackle #1 and #3 first with my own commentary. First, a good strategy should be focused on harnessing growing markets. Too often, companies (especially large, entrenched ones) focus their efforts on defending and protecting their familiar markets that used to be growing but which have since become mature or stagnant. It's their big Achilles Heel, which is why newer faster competitors (often from outside the industry, and often smaller) come in to grab market leadership by hitching their wagon to fast-growth opportunities--often in unchartered waters. Second, a great business idea, even if it capitalizes on growing markets, is only as good as the organization's capacity to monetize and execute it. I believe that the idea, the monetization, and the execution ought to be the three-legged stool of effective strategy, but unfortunately, too many executives focus their attentions primarily on the first one—and hope that their staff will somehow make the other two happen. Great leaders relentlessly focus heaps of their personal attentions on all three factors. Now, let’s go to #2-- this notion of “unfair competitive advantage”. I like that phrase. Here’s my take on it. If you define “unfair competitive advantage” in terms of collusion, price fixing, cronyism, government subsidies or protectionism—then “unfair” yields distortions in markets and a depression of both entrepreneurial activity and sustainable economic growth. This is a situation that I’ve seen in too many segments of the world, particularly in big pockets of Latin America and Africa, but every continent is afflicted. Companies that adhere to this definition of “unfair advantage” may prosper in the short run, but the national economies in which they operate stagnate. I suspect that this is not the definition of “unfair competition” that The Sydney Morning Herald had in mind.On the other hand, if “unfair competitive advantage” revolves around your company’s radically innovative, customer-pleasing technology, product, or service, then you can be sure that your competitors will scream “unfair!” because what you’ve done deviates from conventional wisdom and industry practice—and besides, it’s harder for them to copy you. Using this definition of “unfair competitive advantage”, that is precisely what your strategy ought to strive for. That’s the bar you want to set in your strategic planning meetings. Imagine a country’s economic growth if that’s the tax and legal bar that was set on a national basis. Good stuff from Australia. By the way, I also learned that good Aussie plumbers are in such demand that they can command up to $1500 a day. Are we in the wrong business?

Lead, Learn, or Get Out of the Way

2007-07-25T17:40:00.001-07:00

Patricia Leonard, Executive Vice President of the American Management Association, is a woman with a mission: to build the AMA’s U.S. market presence in a way that truly “breaks from the pack”. When I had lunch with her recently, I was impressed with her passion and foresight. But what doubly impressed me was her expectations of the people who work at AMA. I think it was Tex Schramm, the Dallas Cowboy general manager from 1960-1989 who described his management philosophy as “Lead, follow, or get out of the way!” Schramm was obsessive about raising the team’s performance, and as far as he was concerned, people on the payroll had to make a clear choice: to step up to a leadership position and make things happen; or, to heed the leaders’ directives and implement them like crazy; or, to simply “get out of the way”—which means either leave, or minimally, don’t create any friction or hurdles to the progress under way. It worked. Under his helm, the Cowboys franchised transformed themselves into the incredibly successful “America’s Team” brand. Pat Leonard says that’s not good enough any more. Her motto is: “Lead, learn, or get out of the way!” In today’s knowledge economy, where the application of cutting edge talent is the best predictor of corporate competitive success, employees can no longer simply choose to “follow”. Corporate innovation and performance is an all-hands phenomenon. So from Leonard’s perspective, each employee (including manager) must choose to lead something (a product launch, the execution of a project, a cost-reduction effort—something!). If you can’t do that, she believes, then take it upon yourself to learn what you can do. Learn new skills, technologies and techniques. Learn about new markets. Learn about the deficiencies of the organization and what can be done to address them. Don’t wait for the company to provide you with learning. Seek opportunities until you figure out what you can do to improve things and spur the organization to further heights. At the end of the day, my take on all this is: Whether you’re a leader or a learner, or both, at your performance review you don’t brag about how well you’ve done your job over the past year. Good performance is a given. Instead, you brag about how much you’ve changed your job to create new value for the organization.Knowing Pat, she has even less patience with those who would choose to simply “get out of the way”. Companies can’t afford to keep that sort of organizational lard of employees who retired a few years ago but never told anyone

Lead, Learn, or Get Out of the Way

2007-07-25T17:40:00.000-07:00

Intangible World

2007-07-17T17:39:00.000-07:00

Every time I read about a CEO explaining that his goal is to be the “biggest” player in his industry, I know that his company’s shareholders will ultimately suffer. A McKinsey study shows that over 80% of the S & P 500’s value can be attributed to “intangible” factors—which means that investors don’t appraise the future value of a company by its book value today—the size of its tangible assets carried on the balance sheet. Research indicates that projections of future earnings and cash flow are primarily influenced not by a company’s mass, size, and physical assets, but by its volume of intangible, such as: knowledge and data systematically distributed throughout the firm, cutting edge talent and the ability to attract the best and brightest, institutionalized foresight, a culture of constant innovation, speed and agility in capturing fleeting market opportunities, and reputation for rapid, efficient execution. Companies that have an abundance of intangibles grow in a healthy, profitable way, and ultimately their growth allows them to capitalize on the benefits of size--like scale, leverage, synergy, and marketing reach. But companies that focus on the tangibles (and too many leaders focus much of their time massaging current tangibles, or growing them via questionable acquisitions just to build sheer size and scope) are much more likely to collapse under their own weight. A couple years ago I consulted with a multibillion dollar company whose tangibles were staggering: a gargantuan balance sheet, a substantial payroll, a huge capital budget, and an immense product line. But this company’s intangibles were miniscule relative to its size. The company was marked by a sclerotic multi-layered management hierarchy, little innovation in product or delivery, paralysis in decision-making, archaic information systems, glacial bureaucracy, a dry new-product pipeline, and a hypercautious risk-averse culture. The result: a loss in net income and earnings for each of the prior eight quarters and a market valuation significantly lower than many smaller but more adventurous and cutting-edge (a.k.a. intangible) competitors. Even the products and services that are value-adding have become more intangible. Customization, design, speed to market, the “gotta-have-it” quality of the product—all that is intangible. The other stuff—the actual product or service—is more quickly imitated and commoditized. There's no sustainable growth opportunities in simply making ordinary widgets; the value-add occurs when embedding the widget into a bigger, intangible “widget solutions” package. Intangibles filter down to our jobs. Jobs with more intangibles pay more than jobs that are primarily tangible. If you’re a professional or manager, your kids probably think your work consists of talking on the phone, attending meetings, and pecking away on your computer. If your company tries to compete on tangibles—regardless of its size—it’ll be overwhelmed by cheaper foreign competitors on one end, and by innovative domestic (and international) competitors on the other end. Nowadays, it’s all about building your firm’s reservoir of intangibles. How much of your leaders’ daily attention and resources is spent on that vital quest?

Two Cheers for Good Government

2007-07-12T17:38:00.000-07:00

I needed my son's birth certificate right away and I couldn’t find it, so I took him to the local government office that dealt with those documents. As we drove into the city, I felt a sense of mild dread. I envisioned waiting endlessly in a long, impersonal queue, then dealing with a grim bureaucrat who would somehow prolong my frustration with slow, meticulous indifference. In fact, as I glanced at my watch while seeking a parking spot, I realized that I had really screwed up because the time was nearing noon, and I was certain that regardless of how many “customers” would be waiting for documents, government employees would shut down their operations for their convenient lunch at the stroke of 12. Sure enough, the queue snaked around the corridors, and sure enough, when the noon hour hit, one of the two windows slid shut. But wait! Amazingly, the other window stayed open. My goodness, someone in charge actually considered the needs of people who needed the services of government. Yes, our wait was exacerbated because only one window remained open, but as I explained to my son, in the “good old days” both windows would have clanged shut, leaving everyone outside stewing in frustration for at least an hour. It was a small improvement, but an important one. But wait, there’s more. As my son and I moved forward, we passed cushioned benches positioned at intervals for people to actually sit on, which we did. Somebody in charge actually thought about making the waiting period more comfortable. And then, to my shock, a real human being actually came out of the office and, with a smile, walked up and down the queue asking people if they had any questions about the forms or procedures. And he actually helped some people fill the forms out. And he loaned me a pen to make a correction on one of the questions. And he was friendly! Not only that, when I finally reached the window, even the people behind it were cheerful, and prompt, and helpful. And quick, since the computer readily spit out the birth certificate. Things worked. All of this is small stuff, to be sure. But all the little things that vendors do to make customers feel valued is what customers remember. Those little things changed my entire experience, as well as some of my more egregious stereotypes of government service. In fact, as I reflected upon our experience that day, I remembered that I had even saved time by being able to download the documents I needed to fill out at home. Another “little” customer service that mattered.I guess government is learning. I can’t give it three cheers yet, because that damn window closing at lunch time (the only time when many “customers” have the opportunity to break away from work) more than doubled my waiting time. But when I consider what “service” used to be like at City Hall, I think that two cheers is pretty darn good.

The Value (?!) of Suing Ten Year Old Girls

2007-07-05T17:38:00.000-07:00

Illegal downloading of music is devastating the Big Music industry to the tune (no pun intended) of billions of dollars of lost sales and market capitalizations. One recording label executive told me that a high profile band his company has under contract sold 4 million CD’s last year. Sounds great, except he said that it should have been 8 million. Half the market disappeared in a haze of cyberspace. I’d be frustrated and angry too if I were him. And I wouldn’t preclude the use of attack lawyers to go after the big-time, mass-volume, truly egregious lawbreakers. But when an industry sends out teams of shark attorneys to harass pimply faced teenagers who illegally download songs off the Web, they’re guilty of strategic myopia and hysterical desperation. Not to mention stupidity. Think I’m exaggerating? I could give you too many sad examples, but try this one, which I picked up in the June 27, 2007 issue of The Oregonian. In 2005, the recording industry sued Oregon resident Tanya J. Andersen, 44, a disabled single parent, accusing her of violating copyright laws by illegally downloading music onto her computer. Initially, Andersen told the corporate lawyers she had never illegally downloaded music but was told she had to pay $4,000 to $5,000 or she would be ruined financially. The lawyers further threatened to interrogate Andersen's 10-year-old daughter, Kylee, and indeed they tried to contact her directy. A woman claiming to be Kylee's grandmother called the girl's former elementary school inquiring about her attendance. Sounds like a nightmare, right? Andersen offered to have her computer inspected. Instead, the recording industry sued her. What happened next is so bizarre that I want to quote The Oregonian directly: The record industry claimed that she used a certain Internet name to illegally download music at 4:20 a.m. on May 20, 2004. Andersen searched the Internet for the name and easily learned that it belonged to a young man in Everett, Wash., who admitted on his MySpace account that he illegally downloaded music. Andersen provided the information to the record industry, but officials responded by publicly accusing her of downloading a series of violent, profane, obscene and misogynistic songs. Andersen was an avid user of mail order CD clubs, so (the officials) knew that Ms. Andersen listens to only country music and soft rock. The recording industry's expert finally confirmed that Andersen's computer had not been used to download music, but attorneys still demanded that she pay money before they would drop the case. "They wanted it to appear publicly that they prevailed," Anderson’s counter suit claims. "When Ms. Andersen declined to pay them, defendants (the recording officials) stepped up their intimidation." Two years after filing the lawsuit, the recording industry agreed to drop the case only if Andersen dropped her counter charges. "They also emphasized that that if she did not abandon her legal rights, they would continue to persecute her and her young daughter, and again demanded to interrogate and confront her little girl," the suit says. Andersen finally filed a motion forcing the recording industry to provide proof that she illegally downloaded music. Hours before the deadline to respond, the recording industry dropped its case. Even if Anderson had really downloaded some illegal tunes, the industry’s storm trooper tactics would have been ridiculously counterproductive. She’s one of millions upon millions around the world. The real issue is this: If you’re a company that’s stuck in a compulsion of using lawyers to defend a broken business model, not only are you merely slowing down the bleeding, (and just temporarily at that), but even worse, you’re also failing to look forward and develop innovative alternative business models that either bypass or better yet, fully capitalize on the new technologies. (Look at what Apple did with iTunes and iPods, for example). Even if you win a few lawsuits, you can’t fight the forward migration of innovation and change. So either you’re part of the process and leading a new agenda, or you’re part of history. As Gwen Stefani’s manager Jim Guerinot says: “The major (recording) labels want to say the glass is half full. I think everybody is getting the message: You better get a fucking smaller glass. The music business is a different game.” Crudely put, but right on target. It’s true for a lot of other industries too. The rules have changed. You’ve got to fill the shrunken glass with new value. And new value doesn’t come from filling the glass with lawyers hell bent on recapturing the past.

Young, Hip…And Driving a Buick??

2007-06-28T17:37:00.000-07:00

For the last few years, GM has been paying Tiger Woods a gazillion dollars to appear in ads promoting Buick. The idea, I suppose, is that people will think “Hey, Tiger is cool and suave and hip and successful, and if he’s saying I ought to buy a Buick, that’s good enough for me.” Apparently, it's not happening. The brand remains stagnant, and the average age of Buick drivers is mired at 63, which is more than double Tiger’s age. Why aren't all those promo dollars working? I can think of two reasons: One, despite the obvious appeal of high profile stars like Tiger, LeBron James, 50 Cent, and Elle Macpherson, the reality is, to quote advertising guru Marian Salzman, “People are becoming far less susceptible to the power of celebrities who are seen as shills for a brand.” Two, there’s the old “putting lipstick on the pig” problem. Glittery marketing lipstick won’t change a sow into an eagle any more than it will change an unexciting drab product into a killer “gotta have it” product. That’s the problem with Buick, and apparently, even Tiger can’t change that perception. And that’s pretty remarkable when you think about how he’s managed to change the general perception of golf. A Buick owner’s average age is 63? Heck, when I was growing up, we looked at golf as a game played only by people who were 63, or maybe 163. Tiger’s made golf cooler and younger. If even he can’t make the languishing-for-years Buick cooler and younger, perhaps GM ought to dump the entire Buick brand and focus on something new rather than on trying to dress it up. Remember that old Dakota Indian saying--If you find yourself riding a dead horse, the best strategy is to dismount.There’s always a place for innovative marketing (with or without celebrities). Good marketing will definitely help boost the revenues of a great product, like a Toyota Prius or an Apple iPod (or iPhone). But regardless of any supposed celebrity sex appeal, pouring money into star power marketing won’t compensate for an uninteresting or commodity product for long. GM, I suggest you put Tiger on some cool products. That’s how you’ll get your best returns.

Doing Something With the Data

2007-06-21T17:36:00.000-07:00

I’m observing an executive meeting which has been considering avenues for penetrating the growing Hispanic market. The group has been poring over market research which has highlighted data about demographics, consumer attitudes, financial trends, and such. One vice president has called for the next round of research, in particular some “gap analysis”, and there seems to be a general consensus with his suggestion. The senior executive, who’s been quiet during this discussion, clears his throat. He’s not happy. His message goes thusly: How much more research do we need? We’ve been analyzing data for months. When do we start doing something with this data? Isn’t there some low-hanging fruit? Aren’t there some quick wins we can get in order to build momentum? If we have to do more research, can’t we do it at the same time that we’re launching some initiatives? His questions shocks the group, and take me back to two related incidents in two other companies. In one, an executive confesses to me the reason why his company is so risk-averse, slow, and unimaginative.: “We study a good idea until it becomes a bad idea.” No wonder earnings have been flat for the prior five years.In the second incident, an executive of a fast-growing $300 million firm tells me his success secret: “Ready. Fire . Aim”. His message to me is this: A lot of companies use Ready.Fire.Aim as a slogan, but we take it seriously. Sure, we get ready. We gather data—fast. We do due diligence—fast. We do basic planning—fast. Then we act—we fire. Then we quickly get feedback, spread it around, and use it to aim for the next round. I’ve written about the P40/70 rule in Break From the Pack. Briefly, it goes like this: Imagine the total universe of data that’s available for a decision. If you gather less than 40% of that data, your decision might be premature, even reckless. But if you keep on gathering data after the 70% level, you’re increasing your risk. It’s not just that your returns on your research dramatically diminish after 70%, it’s that you’re vastly increasing the probability of analysis paralysis in your corporate culture. Optimally, you want to gather sufficient data to be in the 40-70% arena, and then combine that knowledge with your experience, hunch, and gut—in order to finally make a decision and get the ball rolling. The executive in the meeting I described above instinctively knew that his team had already passed the 70% level, and that’s why he spoke up. The cool thing was that the group responded. Energy spiked up. Focus heightened. Projects crystallized. Goals and timetables emerged. The vibe in the room was a lot more satisfying and productive than had the group left the meeting with the charge of “Let’s study it some more.”
Posted by Oren Harari at 11:20

Trouble in TaxiLand

2007-06-07T14:21:00.000-07:00

So Avis is now offering a nifty new service. In a test program in 10 major cities, you can book—are you ready for this?—a chauffer with your rental car. In fact, as long as you give Avis 24 hours notice, you can actually have a chauffer pick you up at the airport in the car that you’ve rented. Avis is teaming up with WeDriveU, a San Mateo, California-based company which has been supplying chauffers for companies for two decades. The price? An additional $30 an hour, with a three hour minimum. Pretty cool. Innovative. Groundbreaking. Very nice feature for customers who choose to partake. What tickles me the most is that after the minimum three hours, you can dump the driver and continue driving the rental car yourself! Of course, the entrenched players in the taxi and limousine industries have gone ballistic on Avis, screaming “foul”, “unfair”, “illegal”, take your pick. That’s not surprising. I’ve often told my clients that they’ll know when they’ve truly been innovative when customers are delighted and competitors are furious. But what intrigued me was how predictable the immediate response of the traditional livery transportation companies is. Instead of huddling managers together to figure out how to one-up Avis by improving the customer experiences provided by taxis and limos (better and newer eservices, more options, faster response-times, more flexible pricing, better use and availability of new technologies, etc. etc.), they’ve resorted to the tried and true loser of a strategy: run to the regulators and the lawyers. Anything to stop Avis and preserve the comfy status quo. It’s an all-too-common kneejerk response: In the face of innovations from an “outsider” (which is often the case), throw your weight with regulators and lobbyists-- like Big Steel has done. Or invest in attack lawyers--like Big Music has done. The result is inevitable decline. To be sure, companies must aggressively litigate when competitors do something blatantly illegal. And they are prudent to support professional associations that exercise political influence on their behalf. But when they rely on political and legal force for competitive advantage, they are doomed. Emphasizing legal and protectionist strategies drains a company of the vision, resources, and urgency to challenge and reinvent itself in the face of new competitive realities. In today’s global free-market environment, trying to build a legal and regulatory fortress to protect the status quo is a fool’s gambit. You can’t manage for steady state any more. Value migrates forward regardless of whether you’re in the new game or not. Ironically, Avis’s new initiative might help build everyone’s businesses, including taxis and limos, if more customers start getting comfortable with the idea of letting someone else do the driving. But either way, the first salvos against the old order have been fired. Big changes are coming. As for me, corporations that invite me to speak at their conferences often send a town car to pick me up at the airport. It’ll be interesting if one day a mid-sized Ford rental sedan with driver will come get me. And it’ll be doubly interesting to see how I fit my 6 foot 6 inch frame into the back seat. Hmm, maybe I’ll take that taxi after all…..

Who's Really On Board?

2007-05-31T14:21:00.000-07:00

I had an epiphany last week, and it went like this: After giving a speech on competitive strategy to the board of directors and senior executive team of a large corporation, I was chatting with a few front-line employees who were arranging the logistics of getting me back to the airport. Several of them had heard my speech and had a few unequivocal comments about it. The thrust of their message was: Oren, you need to come back here over and over again because those guys (the board and executive team) talk a good game but aren’t going to do any of the things you advised. In fact, what they do regularly is exactly what you warned against doing in your speech. Then they proceeded to tell me why, in effect, they were hungering for leadership that was bold and imaginative, and what the potentials of the corporation would be if that leadership was in evidence. I remember thinking: Wait a minute, I’ve heard this before. Often. And then the epiphany: When considering innovative action and radical change, top management often asks me “How do we get everybody on board?”, meaning how do we convince and enlist all employees to go a new route? That’s an important question, and I’ve addressed it often in my work. But the fact is that I’ve often heard the same kind of question asked from “lower-level” people about the people upstairs: In effect, how do we get “them” (top management, or our bosses) on board? The more I thought about it, I realized I’ve heard the question of getting people on board asked as often from the bottom as from the top. So why is our professional attention always on how to pull those at the bottom? Perhaps we need to redirect our attention a bit. I’ve frequently told my executive clients to stop worrying so much about getting “everybody” on board. “Everybody” won’t get on board, but in every organization there are many creative, proactive individuals in all levels and functions who are straining at the bit, or at least would be very responsive, for new opportunities to make a difference and take accountability for progress. By developing and liberating those people, and rewarding them properly, the pressure is on the career skeptics to change or leave. With my new epiphany, I now realize that for years I’ve underestimated the number, and power, of the mid-level and front-line folks who really are eager for change. They’re there, and they’re ready to rumble, but what they want to see is management that walks the talk. They want leaders who lead innovative change with collaborative, transparent action, not just periodic words, memos, and directives. They want leaders who themselves are visibly engaged with the "two steps forward-one step backwards" process of executing change. They want optimistic leaders who regularly inspire people to march with them toward unchartered territory. Yeah, the traditional question about getting lower levels on board is still legit. But from now on, when I hear that question from senior people, I’m going to gently throw it right back to them: Are you sure that you’re on board? And if so, are you sure you’re showing it?

Hire or Fire the Crazies?

2007-05-23T14:20:00.000-07:00

You know that “Hero or Villain?” blog I wrote on September 10 (see http://www.harari.com/blog/index.php?/archives/2007/05.html)? I’ve gotten incredulous responses from readers. They find it hard to believe that a company (Kaiser Permanente in this case) would fire a firebrand front line employee who took it upon himself to demonstrate that a multimillion dollar IT investment might actually be a corporate albatross. I am disarmed by their innocent reactions. Reality flash: It happens too often that those talented, innovative and impatient individuals who challenge the ineptness of the status quo are reprimanded and punished, which leads them to polish up their resumes and head for greener pastures, leaving the conforming drones behind to take orders—leaving the “C” suite executives wondering why things are falling apart. Just to muck up the waters even further, consider another little case—this time the polar opposite of what happened at Kaiser. I want to credit Fast Company magazine for this vignette about a little company called Slim Devices, which makes state-of-the-art audio devices that let individuals transfer digital music from their computer hard drives to speakers in their homes. One of the cool things that Slim Devices does is to encourage customers to suggest product ideas, changes, and technological tweaks on interactive online forums. Many of the customers are real techno-geeks, and one of them posted a piece of software that would enhance Slim’s functionality with Real Networks’ online music service. Unfortunately, his contribution was illegal, since it was based on cracking Real’s code which protects data transmission over the Web. Here is how Fast Company described the next delicious scene: “The author of the Real plug-in lived just a few blocks from Blackketter (Slim’s Chief Technology Officer) in San Francisco. Blackketter went over to his house and said, ‘That’s a really good hack, man’, but told him it wasn’t legal. Only mildly daunted, the hacker put the plug-in on his own Web site rather than Slim’s. Then, sure enough, an email came from Real Networks asking him to take down the posting—and in classic Silicon Valley fashion, to visit Real the following week for a job interview (my emphasis). Slim managed to hire him first (my emphasis again), then eventually worked out a legal relationship with Real and incorporated the plug-in into its players.”So there it is. Kaiser fires the crazy who made value-adding waves. Real Networks and Slim Devices race to hire the crazy who made value-adding waves. Which approach do you think is better in today’s nutty marketplace? Which approach does your organization take? As Slim vice president Patrick Cosson notes: “You can’t be heavy handed and kill the creativity. But you have to manage the chaos and resolve disputes.” Sounds good to me. Vive le crazies!

The Dangers of Commodity Work

2007-05-15T14:20:00.000-07:00

Several years ago Deborah Mayer taught elementary school in Indiana. Then she was fired. The reason was four words: “I honk for peace”. That’s the reply that she gave a student who asked her if she would ever take part in a peace march. The case is wending its way up the court system’s food chain, and legally, it revolves around the issue of free speech. As a citizen, the case would interest me, as I’m sure it would you. But from a business perspective, what strikes me as also worthy of discussion is the rationale given by a federal appeals court which denied Mayer’s claim that her speech was violated. The court stated that the teacher’s speech is “a commodity she sells to an employer in exchange for her salary.” Did I hear that right? This is another reason why courts and legislators should be carefully bridled before being unleashed on an unwitting economy. The best leaders (including school principals) understand that any organization in which employees simply do “commodity” work is an organization doomed to mediocrity and inevitable decline. Commodity work—defined by job descriptions, employment contracts, official company directives, and such—are the bare minimum standards in today’s hypercompetitive environment. They highlight the kinds of performance that in aggregate, allows companies to survive—for the time being. But to thrive, organizations need to have employees fully engaged in not just “doing” their work, but regularly critiquing it and changing it in order to continually create more value for the organization and its customers. And by achieving these higher hurdles, employees ought to be psychologically rewarded and financially compensated well beyond conventional wisdom commodity benchmarks.I tell my clients repeatedly: If you recruit and pay for commodity work at any level and any function, you’ll get commodity output, which is the kiss of death in today’s marketplace. Further, I advise them that if they see chunks of their organization buried in commodity work, then they must consider these alternatives:: 1. Lay out new (higher) performance expectations, create a new culture of empowerment and accountability, train the dickens out of people, help them overcome their fears of the new, and then get the heck out of the way. 2. Reward the creative contributors generously. Terminate the chronic nay-sayers..3. Hire and promote talented people—the kinds that want to be treated as “businesspeople”—the kinds that are eager to learn, are excited to set more ambitious goals, and who want to take initiative and responsibility. 4. Whenever you can’t do #1, #2, or #3, then go another route: eliminate, digitalize, divest, outsource or offshore the functions and activities (including total jobs) that cannot be de-commoditized. My point is that no healthy vibrant organization would accept the federal court’s perspective that an employee or manager sells commodity work for a (commodity) salary. But I’ve seen unhealthy organizations with leaders who can’t understand why their “industry-standard” wages and “clear job descriptions” don’t generate groundbreaking products, services or cost-cutting efforts. And I’ve seen tort lawyers sue companies who terminated an employee who would only do commodity work on the grounds that the employee was “adequately” performing the “job description” or “terms of the contract.” And by the way, notwithstanding how Deborah Mayer’s case turns out, this little discussion is so very applicable to our public school system. As I’ve written in my February 15 blog “Are Teachers Overpaid? What a Stupid Question!” (see http://www.harari.com/blog/), if we’re to compete in a knowledge economy, we desperately need to attract and retain teachers who don’t view their work as a commodity.

Hero or Villain?

2007-05-10T14:19:00.000-07:00

Imagine this. You’re the CEO of a multi-billion dollar company that’s dispersed over several states. Your company has invested millions of dollars in a new IT system. One day you learn that a 22 year old employee somewhere in the bowels of your company has sent a lengthy e-mail to staffers throughout the organization documenting the inefficiencies and glitches of the new system, and suggesting that even the process by which the IT vendor was chosen might have less than stellar integrity. This is pretty much what happened to the giant health maintenance organization Kaiser Permanente. The kid in question is Justen Deal, and his e-mail highlighted, point by point, why the new system was generating problems not just with costs but with medical providers’ abilities to serve patients. And for good measure, the memo took CEO George Halvorson and other senior executives to task for jeopardizing Kaiser’s capacity to deliver high quality care because of their unquestioning allegiance to the IT system in question. If you were the CEO, what would you do? Would you fire Justin Deal? Well, that’s exactly what Kaiser did, and I suspect that most companies would have done the same. I say they’re stupid. I say Halvorson should have promoted Justen Deal. No, I’m not crazy. Consider: Here’s a kid who, on his own initiative, documented significant glitches and inefficiencies of a new IT system. On his own initiative, he did the due diligence (poring over budget and engineering reports, for example) that suggested a potential seven billion dollars of dollars of costs to Kaiser from system failures and poor output. On his own initiative (and courage), he wrote a report which he sent to his boss, Kaiser’s compliance officer, and the Kaiser board. Only when nothing happened (why am I not surprised?) did he go public within Kaiser, and not for self-aggrandizement, but because he was concerned, as the April 24 issue of Wall St. Journal reported, that “poor decisions…are positioning us for potentially catastrophic failure.” What sort of an employee do you want? A drone who takes orders well and plays it safe, or someone who takes it upon themselves to do what it takes to add value to the company, even when that means butting heads with sacred cow processes and with silverback gorilla managers? Ironically, Kaiser might have eventually paid a ton of money to an independent consulting firm to have come up with a similar document-- after the system was already clearly malfunctioning, of course. In fact, as the Journal pointed out, here’s what did happen: the frenetic attempt by Kaiser to kill the memo and paper over the mess with a public relations blitz failed, the fired Deal became a hero in the Web community, the “whistleblower” policy within Kaiser was dealt a big credibility blow, some of Deal’s technical concerns already seem to have achieved some objective traction, and the CIO of Kaiser abruptly quit. Now imagine a different scenario. Imagine if CEO Halvorson would have said: “You’re telling me that a 22 year old kid came up with all this? On his own time? I want to meet him. I want to listen to him. And if he makes sense, I want him to be part of an IT evaluation project, with full honors and a hefty increase in pay. I want everyone to know that this is the kind of person we’re interested in recruiting and retaining-- even if he’s not 100% right. And I want everyone to know that if we’re made errors, we’re going to fix them, even if it’s personally embarrassing. That’s how we build a culture of innovation and accountability.” Instead, the IT system and its entrenched defenders remain, and Kaiser has lost a curious and committed employee, the kind of employee who on his own initiative had edited Kaiser’s listing on Wikipedia because nobody else did—until, of course, higher-ups told him to cease and desist. (Again, why am I not surprised?)Do yourself a favor. Don’t spend gobs of money on motivational speakers and happy-talk training sessions which spew out pat phrases like “Empower your people!” and “Innovate and change!” until you’re clear that in your company, people like Justen Deal are more likely to be treated as heroes than villains.

Why Toyota Isn't Happy About Being #1

2007-05-03T14:18:00.000-07:00

In the first three months of 2007, Toyota sold 2.38 million vehicles worldwide to GM’s 2.26 million, which means that Toyota is now the biggest car company on the planet. And yet, according to a few news releases, Toyota is not comfortable with being #1 and didn’t seek to be #1. “I don’t believe that”, said one of my clients, an executive who thinks about boosting sales every day. “I’m sure they’re thrilled with being the top dog.” Well, maybe. I worked with Toyota for years and interacted with the top American and Japanese executives of the firm, and with that experience I frankly do believe that their ambivalence with being #1 is real. Three reasons: 1. The first reason is political. Toyota is dependent on global sales, especially to the U.S., and it doesn’t want to provide protectionists with ammunition. It prefers to stay under the radar scope as a quiet underdog. 2. The second reason is complacency. It’s a lot easier to become complacent when you’re #1. Like most great companies, Toyota leaders know that complacency is much more debilitating than any products that GM or Ford can throw into the marketplace. Look at business history and you’ll see that one of the best predictors of corporate failure is corporate success, because that little intervening variable “complacency” creeps in and slowly smothers urgency, change and innovation. 3. The third reason is profitability. This one is at the heart of the differences between how GM and Toyota approach their businesses. GM’s mantra has always been: do whatever it takes to maintain market share and sales, regardless of the impact on bottom line. Toyota has always been about steady, prudent, profitable growth. That’s why GM’s incentives to buyers have been more than double that of Toyota. Put another way, American customers have agreed to pay an average of 12% more per Toyota car than a GM car. On the cost side, Toyota’s obsession (and that’s not too strong a term) with cost reduction means that Toyota’s productivity growth is double that of GM’s, and the company averages $2400 of profit more than GM does per car sold. So even as GM has maintained its lead in global sales (until Q1 in 2007, at least) and still leads in market share in the U.S. relative to Toyota (23.3% vs. 15.7%), GM lost $2 billion globally in fourth quarter 2006 (including a $799 million loss in the U.S.). In short, Toyota doesn’t want to catch GM’s “being biggest at all cost” disease, and that is why Toyota executives approach their new #1 status gingerly. By the way, in what appears a masterful public relations rationalization, GM is now making noises that size is no longer as important as profitability. Yeah, right. Bill Ford said the same things a few years ago about his company, but it seems like business as usual has prevailed there. Profitable growth is part of Toyota’s DNA, not yet in GM’s.

Why Harley Rocks

2007-04-17T14:18:00.000-07:00

Sometimes the best analysis comes from a spontaneous response to a question. Last week I was interviewed for a magazine story, and the interviewer asked me about Harley Davidson. He remembered that right up to the 1970’s, Harley motorcycles were bought primarily by a small niche of Hells Angels-types and aficionados who had the time to spend hours a day tinkering with their beasts. How, he asked, did Harley turn into one of the most popular and profitable brands in the world? Off the top of my head, I rattled off five major reasons, and now that I review them, I don’t think I need to edit or reinvent my response. Here are the reasons for Harley’s continued success, why shareholders have been delighted with its performance, and what you and your organization can learn from it: 1. First and foremost, Harley cleaned up its lousy quality. Yeah, I said lousy--like back in the 1960’s when new bikes sat in the dealer showroom with cardboard under them to catch the leaks. A fanatic and disciplined organization-wide quality commitment had to happen, and it did. The lesson for you: Nowadays, defect free product is expected. You won’t thrive by only achieving zero defects, but without it, you probably won’t survive. 2. Harley transformed its organization from one marked by hierarchical control and assembly-line structures to one that is flatter, more egalitarian, and much more self-managed team-based. Well trained and merit-rewarded employee teams became involved in the process of improving quality, boosting speed, and reducing costs. The lesson for you: In a global knowledge economy, you need everyone’s active input, and you need to train and reward people not simply for “doing their jobs” (that’s a given), but for using their brains and contributing to the organization’s success. 3. Harley expanded its niche by building community with its customers. The Harley Owners Groups (HOGS) coupled with numerous events and rallies in places around the country got customers to feel connected to something special—and to each other. Lately, Harley’s community efforts have reached out more to women, not only with female-friendly bikes but also with “how-to-ride-a-Harley” classes. The lesson for you: Customers don’t just buy a brand; they join it. Create a special community that provides distinct benefits to customers and is a privilege to join. Especially with the new social power of Web 2.0, community ought to be towards the top of the list when it comes to customer relations. 4. Harley began to market the “intangibles” like the special experience and image of owning and riding a Harley Davidson bike. It was not uncommon for Harley executives to talk about building the brand around adventure, rebellion, and making the middle-aged accountant feel like a “bad-ass” (their words). In that spirit, even the familiar “potato-potato-potato” rumble sound of the Harley was patented. The lesson for you: concentrate on building intangibles like the unique customer experience you offer, the feelings that using the product evokes for customers, the coolness and excitement of the product’s design, and the distinctive customer service that precedes and follows a sale. 5. Even as the brand became more popular and demand shot up, Harley controlled supply and production, thus controlling its growth and keeping the products fresh, compelling, and desirable. Too many companies get so caught up with growth at any cost that they wind up overextending themselves financially and diluting the brand. Harley insists on disciplined growth that keeps both its allure and its profit margins large. The lesson for you: Don’t lose your cool, or your sense of financial discipline, by plunging ahead towards unbridled growth just because the short-term opportunities exist. Think longer term, think disciplined controlled growth, and think about the value of not overexposing and overleveraging your brand.\Notice there’s one thing I didn’t cite: the “fact” that Harley is “American-made” (which is not completely true anyway). Even if it was, in a global economy appeals to patriotic protectionism won’t get you very far. American customers will buy great product from anywhere, witness the success of Toyota, Virgin, Honda, and Samsung. The fact that Harley-Davidson is considered synonymous with the U.S. of A. might be a nice icing on the cake, but it’s the 5 reasons listed above that are the secret of the company’s success.

Wow, a Real Team!

2007-04-10T14:16:00.000-07:00

Every once in a while I come in contact with a genuine, no-b.s. TEAM. It’s rare. Most of the time what masquerades for “teams” in organizations is a hodge-podge of risk-averse conforming little bureaucracies, or pathologically politicized battle stations sprinkled with multiple hidden agendas, or superficial collections of individuals who feel little connection with one another other than what their job demands. And then there’s DMB/Highlands Group, a successful boutique land development firm which last week asked me to lead a discussion about strategy and leadership with the top ten executives and partners. Forget the particulars of what we discussed; the important thing is that as we discussed them, I realized that—wonder of wonders—I was talking to a real team! How do I know? Here’s the litmus test that I use to determine whether any so-called “team” is the real deal rather than just standard lip-service. I offer five simple criteria (you can use them to rate your own team): 1. Communality: There is a clarity, consensus and passion among all team members about the team’s vision, dream, cause, philosophy, values, culture, strategic agenda, and primary goals. For obvious reasons, genuine collaboration is much easier when communality exists. For less obvious reasons--when communality exists, conflict within the team is usually healthy because people argue about the best and most innovative means to reach the common ends. When communality is low, conflict is often dysfunctional because there’s no consensus about the overarching issues and desired endpoints. 2. Accessibility: Any team member can quickly and seamlessly access whoever on the team, or whatever team-relevant information (financial, customer, regulatory, etc.) that he or she needs to accomplish team work. Organizational and interpersonal barriers to connectivity are kept to a minimum. 3. Transparency: The team spirit is one of candor and trust. It’s either-or: If you’re a team member, do you trust your colleagues? Can you count on them? Is everyone open and forthright with each other? Are opaque, secretive communications and information simply not tolerated within the team? 4. Harmony: This one sounds soft, but it’s really important. Do the team members care about each other as individual people? Do they respect each other? Do they sincerely enjoy working together? 5. Meritocracy: At the end of the day, the team has to be focused on achieving high, and ideally exceptional goals, and in the same spirit, rewards (both individual- and team-based) have to be contingent on performance. The ultimate value of communality, accessibility, transparency and harmony is that they provide the paths and fuel for high performance. A team exists to accomplish something, to win something, to break through something, or to leave a legacy about something—and in a real team everyone on the team holds himself or herself accountable for contributing to that cause. No-nonsense, unapologetic and unabashed meritocracy must permeate the team’s soul. As the Highlands executive team worked with me, it became pretty obvious that it met these five criteria. Please don’t ask me how I knew. I’m not psychic, but the team “vibe” was crystal clear. In fact, I asked the team members point blank to evaluate their team on these criteria; unsurprisingly, the scores they gave on each criterion were very high. One last thing: We talked about the critical importance of “fit.” If your team is truly marked by high levels of communality, accessibility, transparency, harmony, and meritocracy, you don’t want to ruin it by inviting someone who doesn’t “fit” those attributes to join the team, regardless of their skills, organizational position, or resume. Believe me, even one “mis-fit” can contaminate a great team, and if you see that happening, make sure to get rid of such people as quickly as possible. Remember, in a real team that fits the five criteria, you want to make sure that anyone who joins it personally fits those criteria too. And if your current “group” doesn’t meet the criteria of a real team, then start developing a real team using the building blocks of communality, accessibility, transparency, harmony and meritocracy—and then selectively admit only those who might well fit the five criteria, in addition to whatever useful competencies and resources they bring to the table.

Outsourcing Will Be Replaced by Networks

2007-03-28T14:15:00.000-07:00

“Ram” Ramadorai is the CEO of Tata Consultancy Services, an Indian information technology company with revenues exceeding $3 billion per year. Tata is the biggest IT services company in India, and as such it is one of those companies that Lou Dobbs regularly rails against: it’s a business that offers information systems, business process, infrastructure and engineering services to corporate customers for cheaper rates than do comparable U.S. firms like IBM, HP and Oracle. Therefore, we should view Tata with deep suspicion, for as we all know, Indian outsourcing businesses are nasty, evil, American-job-sucking monsters.Or are they? In a recent keynote speech to the World Outsourcing Summit sponsored by International Association of Outsourcing Professionals, I argued that in the future, terms like “outsourcing” and “offshoring” will become increasingly irrelevant. These terms assume a longstanding stereotype-- that nearly all the work of any company occurs within four organizational walls located within one country, with little bits and pieces of routine work occasionally (and grudgingly) being farmed out for dirt cheap rates to organizations in other (usually developing) countries. That stereotype is dying, and rightfully so. Increasingly, cutting-edge companies are defining themselves as global webs of best-of-breed relationships, as seamless networks of talent and resources not limited by geography. In that context, the value and health of the company is based in large part on the value and health of its partners, and thus the traditional stereotype of “internal” vs. “outsourced”, or “domestic” vs. “offshored”, becomes less and less germane. That’s why companies as diverse as GE and Proctor and Gamble have numerous ventures and research labs outside the U.S., and view much of their future growth and competitive advantage as coming from new products and systems developed by partners outside the U.S. It’s why telecom supplier Ericsson attributes its amazing turnaround in the last five years to its collaborative network of global relationships—like Sony for design and style, French Telecom for music and audio, Flextronics for manufacturing, and Google for Web capabilities. Ericsson didn’t seek the cheapest “suppliers”; it chose the most value-adding partners to fill specific gaps in its own knowledge bank.So back to Tata. Yes, its prices are attractively lower than those of many other American and European providers, but it’s good at what it does. There’s no price-quality “trade-off”. Once a simple source of offshoring for American firms, Tata has become so successful that it is now expanding into countries like China, Brazil, Chile, Hungary, and the U.S.—and hiring the locals (like 10,000 U.S. employees). One could legitimately argue that Tata is outsourcing the outsourcing business, but that’s the wrong paradigm. Increasingly, in all businesses, the new strategic conversations will be about borderless collaborations. The new “organizations” will be hubs of best-in-class capabilities and contributions from anywhere around the world. And Tata, like GE and Ericsson, will be part of that paradigm. (Small wonder that Ram Ramadorai counts IBM, Oracle, Adobe and HP—traditional “competitors”—as partners in specific ventures.) The net result will be more corporate growth and more jobs everywhere. American companies that outsource their IT functions to Tata grow and hire more Americans. As Tata grows, it hires more Americans. Meanwhile, as American and non-American companies grow, they hire more non-Americans elsewhere.As companies transition themselves to collaborative, borderless networks, I don’t want to be too Mary Poppins sugary about all this. As I’ve written elsewhere, the individuals who lose jobs when work goes elsewhere are in pain, and deserve some societal help. And “partnerships” require a lot of work to maintain. But at the end of the day, as Ramadorai puts it: “Any creation of jobs or opportunities in one country is not at the cost of another country. The multiplier effect of the value the U.S. corporations we work with will deliver to shareholders and their employees is phenomenal.”

The Ingredients for Leading Change

2007-03-19T11:11:00.000-07:00

I recently received an e-mail that is so “perfect” for my blog that I simply reprint it here. The writer, a client and a division president of a prominent high-tech firm, wishes to remain anonymous, but his words, mindset, and passion about leading change are so on-target that they deserve everyone’s attention. I’ve deleted the confidential portions of his e-mail, but what remains is gold for the kind of spirit that is needed to create a “break from the pack” change. His firm is a “business to business” enterprise in the high-tech market, but trust me--any leader in any business can read, enjoy, and learn from his message. Here it is: Our "New" (Company X) is now transforming its identity to focus sharplyon a differentiation model. I believe we need a revolutionaryapproach to making this transformation, not an evolutionary one. Frommy perspective, there are a few VERY important things we mustaggressively address:1 - The trend of commoditization across our product lines isaccelerating. We are caught up in it and moving down rapids toward thefalls. Prime conditions in our industry are feeding this frenzy:several competent competitors and many strong customers with sophisticated Purchasingorganizations. We must build a high sense of urgency within ourorganization regarding the final outcome of this direction (to avoid CommodityHell, as you call it) and the need to ACTIVELY / RADICALLY swim out ofthese rapids toward shores of sustainable profitability.2 - We must find new, creative ways to identify, understand and executeunique combinations of hardware, software and service offerings.These offerings must be wrapped in a unique customer EXPERIENCE whichradically sets us apart from the competition in a way which is valuableto the customer (and translates into margin-building prices/$$$ for us).3 - This new identity must also be credible and viable... built largelyon a foundation of EXISTING core competencies and strengths which allowus to deliver on our promise to the customer, albeit in new and creativeways.4 - We must inject a more powerful Marketing mindset which defines theseofferings and experiences through the eyes of a powerful, discretionarycustomer. A customer which makes buying decisions influenced not onlyby valuable functions and features, but also by perceived value in areasof trust, image, emotion, reliability, exclusivity, etc. Today, we aredominated by a mindset which is still blinded by asterile, logical belief that if a product has more features, performanceand functionality, it should demand a higher premium from customers.There is little focus or even understanding of the need to deliversweet-spot solutions to customers perceived as worth the premium becausethey deliver something unique beyond just the bestperformance-per-penny.5 - I intend to create a small group dedicated to working very closelywith our strongest sales teams at our most important customers instrategic market segments to deeply understand these value driversacross many areas mostly overlooked. I believe this group needs to becompletely dedicated to this charter and recruited with a specificskills set, not found in our current sales or marketing teams. Thisgroup will report directly to me.OK... I am obviously passionate about this topic. I see it so clearlyand want to build the same passionate conviction within my leadershipteam because I am convinced it will lead us to sustainable andprofitable leadership.Now that's the kind of e-mail I like to receive!!

Offshoring Heart Surgery?!

2007-03-08T11:11:00.000-08:00

Last month I gave a keynote speech to the delegates at the Outsourcing World Summit. It was my fourth keynote to this group over the past few years, so I like to think I know something about the subject (see for example, an article entitled “Offshoring Realities, Onshore Solutions” http://www.harari.com/articles.php?WhichArticle=45). But only a couple days ago I had a profound and emotional “aha!” moment that may have permanently affected my entire perspective on offshoring. After finishing a speech to a corporate group , I was invited to have lunch with the CEO of the company. As we broke bread, he introduced me to the luncheon speaker, who turned out to be Dr. Billy Cohn of the Texas Heart Institute in Houston, who is one of the nation’s premier heart surgeons. Cohn gave a superlative speech on the latest mind-blowing innovations in cardiology and surgery, particularly new non-invasive approaches which will replace many of today’s “open ‘em up and cut ‘em” procedures. But one scenario Cohn described was really wild: a prototype technology in which the surgeon, hunched over a computer screen showing the precise graphic details of the patient’s anatomy, was able to simulate the surgery online, and in the process control robots which did the actual invasive and non-invasive surgeries on the patient's heart. This is a much more precise and accurate intervention, and it will be scalable and common within a decade, if not sooner. Cohn showed a short video in which the surgeon, armed with his desktop computer, worked about 10 feet from the robots and the patient on the operating table. Fascinating. And then Cohn said something that really blew me away: He pointed out that there was no reason for the surgeon to be in the same room as the robots and the patient; in fact, there was no reason for him or her to be in the same country! As long as the computer can be digitally connected with the robots, the patient can be in San Francisco and the doctor can be in New York, Zurich or Delhi. Wow! Suddenly the accelerating velocity of globalized offshoring took on a deeply profound dimension. If I want to have heart surgery (or, for that matter, any type of surgery), I can theoretically choose the best doctor for me from anywhere in the world, and I don’t have to visit him, and he doesn’t have to come here. He can do what's necessary from wherever he or she is: instantly receive whatever medical data he needs from the hospital, talk to me via phone or Web or videoconference, schedule the surgery, and then “do it” to me even if we’re separated by thousands of miles. And, technically, given the amazing precision of the hardware and software, he would do a better job that way than if he was actually doing the surgery by hand on site.I’ve often said that every industry nowadays is being impacted by the “Perfect Storm” collision of globalization, deregulation, and technological advance, all of which relentlessly crush time, distance and physical barriers to the accomplishment of work. Viewed in that context, remote digitalized surgeries are a natural consequence. Is that “offshoring”? I suppose it is, but I predict that in the near future that won’t matter. In fact, I predict that “offshoring” will soon become a non-word, or at least an irrelevant one. “Offshoring” suggests that nearly all the work of the organization occurs within four walls, or within sharply defined borders, and little snippets of work are (reluctantly) parceled out to foreign entities when absolutely necessary. But in the future, the successful “organization” will increasingly be seen as a web of high value-add relationships--an extended global network of optimal talent, knowledge, resources, and assets. Companies as diverse as IBM, GE, and Proctor and Gamble are already beginning to operate as such, in tasks as varied as product development, supply chain management, engineering and design. Proctor and Gamble CEO A.G. Laffley, for example, reckons that by the year 2010, at least 50% of new products in P & G’s pipeline will come from employees and external partners located outside the U.S. That, of course, will generate new growth for the company, which will then contract with more talent both in the U.S. and abroad.Think about it: A hospital in the U.S. that views itself as a web of high-value global relationships will be able to seek the best medical staff in the world. The difference is that those talented MD’s may be scattered around multiple continents and will not have to move to the U.S. to deal with that hospital’s patients.

When it Comes to Customer Service, We Still Love Heroes

2007-03-01T11:10:00.000-08:00

I tell my corporate clients that if they want their company to build competitive advantage, they’ve got to focus on caring for the customer in extraordinary ways. But that’s not enough. I also tell my clients that if their customer-care systems and culture are tepid, they can’t rely on the occasional good-hearted employees who go out of their way to serve customers. That is, they can’t rely on episodic, or idiosyncratic acts of heroism from isolated individual employees. Instead, leaders must institutionalize the customer care process so that customer service is genuinely a #1 business priority—and even more important, so that every employee, every process, every system, and every job requirement contributes to leading customers to a terrific experience. The best customer service companies—like Virgin Airways, USAA, Four Seasons Hotels, Nordstrom—work feverishly to institutionalize great service as a means to brand themselves and justify their price points. And yet, and yet---after all my research-based commentary on institutionalizing customer care, I know that what really and truly touches us are the genuine acts of heroism from those overworked, underpaid individual front-line employees who solve our problems, give us a sense of joy and hope, make our lives better—and in the process make their organizations better and their executives richer. I know. I just experienced it. My parents just moved into a retirement village. New house. Guy from the cable company comes in to set up TV and Internet. After fiddling around everywhere, the cable guy says to my folks: “There’s a weak signal on this property. You’re going to get lousy reception on your tube and your pc’s. We can’t do anything.”Imagine. You’re 80 years old. You’ve just bought a new home. When doing your due diligence with your realtor, you never even assumed that there would be problems with TV and internet access. Now what? The deal is done. This is crazy. It’s crazy-making. So another call to the cable company which to its credit sends out another cable guy right away. Kudos to Comcast for understanding that its individual offerings are becoming commoditized, and that a big chunk of its value add will have to come from success in institutionalizing good after-sale customer service. So the second guy comes out. He reiterated the first guy’s conclusion, which was, in effect, You’re stuck with a lemon house, sucker. But I give him great credit for one thing: he provided my parents with the number of his supervisor in case they wanted to take up the matter further. His boss turned out to be the hero. I was there when it all happened. His name is Bob Hahn, and he called my parents at noon and told them--I kid you not--that he would be at their home “between 3:20 and 3:30 p.m.” Is this a joke? Of course he won’t be there within a ridiculous ten minute window. I was right. He was there at 3:15. What can I say? The guy spent more than three hours crawling in the attic and crawling out in the rain until he finally solved the problem. It wasn’t just the fact that he was ultra-competent (considerly more so than his predecessors); what really impressed us was that he was ultra-authentic and ultra-caring in a calm, professional, and friendly way. He always looped back to explain to us what he was doing and what he was finding. He treated my parents with dignity. And he left only after temporarily rigging up the system so that my parents could enjoy great reception that night, and only after reassuring them that he personally would come back to fix the system permanently. You don't need to have an MBA or Ph.D for this stuff. Why is it so hard for companies to understand its importance? I know this is an “aw-shucks” story. I like to think that Bob Hahn is amply recognized and rewarded at Comcast, and I like to think that more Bob Hahns are being recruited, trained, and groomed at Comcast, but I’m not naïve about these matters—except in companies where customer service is institutionalized rather than just being given lip service (and I’m not certain where Comcast falls on that continuum). But I do know this. My parents are staying with Comcast, probably for the rest of their lives—even though they have choices with competitors like AT&T, DirectTV, and super-low-price Astound. (And they’ve added Comcast’s phone service for good measure). And they’re remaining with Comcast not because of what Comcast’s high-priced CEO, CFO, consultants, program directors, and M & A dealmakers did for them. They’re staying because of what Bob Hahn did for them. Customers love front-line heroes. I wish more executives did.

Two Questions About the Copycat Economy

2007-02-22T11:10:00.000-08:00

Over the past few weeks I’ve been doing some webcasts, sometimes called audio web seminars. Fascinating concept. I sit in my office or a hotel room in front of my laptop and a phone. My powerpoint slides are beamed to an audience around the U.S. (sometimes abroad too) and while I control the slides I speak my presentation into the phone. Questions from the audience are e-mailed or phoned into the offices of the enterprise that is producing the show (like Soundview or BetterManagement), and then they are relayed to me. Anyway, last week I did a webcast with BetterManagement about some of the concepts of my latest book Break From the Pack. My main thesis in the book is that today’s Copycat Economy is marked by extreme deregulation, globalization, technological advance, and transparency—all of which lead to accelerations in commoditization of current products and imitation of current services. Therefore, the primary strategic challenge (and opportunity) for any leader is to determine ways to continually “de-commoditize” and “un-imitate” in a way that matters to customers and investors. Before I began my talk, Bill Marriott of BetterManagement posed two quick questions to the senior managers that comprised our virtual audience in 70 corporate locations. 1. When are your organization’s primary products or services likely to be duplicated? (Response options ranged from “never” to “already duplicated.”)2. Does your organization clearly differentiate its products and services from competitors? (“Yes” or “no”)The responses—coming from a wide array of industries-- were interesting: To the first question—about duplication of current primary products and services--here was the breakdown of responses: Never - 0.0%Within years - 33.3%Within months - 22.2%Our product or service has already been duplicated - 44.4%There it is: Clear evidence of the Copycat Economy. Remember, the question wasn’t about ancillary or minor products; it was about primary sources of revenue. No organization—regardless of its size, scope, reach or scale, is safe from the attacks of commoditization and imitation. If anything, my research reveals that the velocity of these attacks is accelerating, which means that even the answer “within years” might be wistful thinking. Certainly, it may be prudent to protect the sources of your current cash flows. It may be wise to continually improve your current cash cows. But that’s for surviving. If you’re interested in simultaneously thriving, you must also be thinking about challenging and reinventing your products, your value proposition, and how you approach your business before the market forces you to do it anyway.For the next question—whether the organization can clearly differentiate products and services from competitors—the response was as follows: Yes - 44.4%No - 55.5%Interesting results. Those who answered “no” clearly need to address this issue with high urgency (not panic). To those who answered “yes”, here’s a couple things to think about. First, make sure that customers and investors are the ones who say “yes”; don’t simply take the word of your engineers, marketers, and other insiders. Second, if the answer is really and truly “yes” as defined by customers, congratulations. But in that case, don’t allow yourself to get complacent, arrogant or risk-averse. Use your current market leadership to take the prudent risks to “de-commoditize”, “un-imitate”, and “re-invent” further. The business landscape is riddled with carcasses of companies that were once market leaders but failed to keep up with migrating value in the marketplace. Remember, the Copycat Economy is relentless and takes no prisoners.

Are Teachers Overpaid? What a Stupid Question!

2007-02-15T11:09:00.000-08:00

In the February 2 issue of the Wall St. Journal, Jay Greene and Marcus Winters make the argument that teachers are not underpaid because they earn the equivalent of $34.06 per hour. It’s a preposterous argument, and it goes directly to the heart of our competitiveness as a nation over the next decade. I’m a professor at the University of San Francisco. Therefore that makes me—full disclosure—both a teacher and a member of a prominent national teachers union. I’ve occasionally attended faculty “union meetings”, and I receive the union magazine which describes labor and educational activities in schools from kindergarten through college. So I know something about the subject at hand, and you may be surprised at my conclusions: 1. First and foremost, the teachers union is primarily concerned with protecting the welfare of its members. Nothing wrong with that, but you can ignore the union's pap about the kids being the first priority. No, the first priority, by far, is wages and conditions of employment. 2. The union is politically and ideologically liberal-to-left, unabashedly advocating conventional policies and politicians. Seniority and tenure are openly worshipped, performance- and merit-based compensation are openly disdained. All problems will be solved with more taxpayer money poured into the status quo. Vouchers are anathema. 3. Moving away from the union to the teachers themselves, a different picture emerges. Anyone who doubts the sincerity and commitment of most individual teachers is, frankly, an idiot. Forget college professors--that’s a whole separate story about entitlement. In this blog, I’m talking about the majority of real life K-12 teachers who bust their butts trying to educate our kids under some of the most challenging conditions, including overcrowding, violence, multiple languages, and parents who aren’t around. God bless the teachers. 4. I consult with a lot of corporate executives. Almost universally, they agree that the most important competitive need for both their organizations and for this country is an expanding pool of highly talented employees. Without a great educational system, where, pray tell, will these talented people come from? Every successful leader I’ve worked with knows that if they want their own organization to succeed in a global knowledge economy, a failure to invest seriously and heavily in their people is a fool’s gambit. Why can’t we take that perspective with education? I’m not talking about pouring more money into rat holes of education bureaucracies; I’m talking about dramatically boosting teacher pay. If our kids’ minds are our number one resource, shouldn’t those who are entrusted to teach those minds be paid with high prestige dollars?5. Until we as a society are willing to elevate the financial status of good teachers to a high attractive level, we are not serious about innovatively preparing young human resources to compete in a knowledge economy. Let me be more specific: In this country, we assign a monetary value to jobs based on the skills needed to do them and on the value-add that those jobs provide. That’s presumably why doctors and investment bankers make more money than janitors and tow truck drivers. The way we can attract and retain the best and the brightest and most innovative people to the teaching profession is to offer them compensation for excellence that is in the six figure neighborhood. If I was king of the USA, I would begin the painful process of ridding the teacher ranks of that small, nagging pool of incompetents and deadwood (yes, I’d flight the tenure establishment and union protectionism), and then I’d raise base pay and tie mega-bonuses to performance metrics—test scores, for example, or other quantitative assessments of student accomplishment—so that excellent teachers could double their current pay, even to more than $100,000 a year. Boy, would you see some innovative upheaval in education if you did that. And yeah, if I knew that this super-compensation was based on documented super-results, I would gladly allocate more tax monies to education. 6. And that brings me to Greene and Winter’s absurd notion that teachers are now paid generously because they have lots of vacation time. Arguing that teachers work only the number of hours they are actually in the classroom teaching is like saying pro football players work only one hour a week on Sunday when they’re playing the game. Greene and Winter go further, in fact, and argue that the correlation between teacher pay and results is low. Sure, if you’re talking about the marginal difference between $45,000 a year and $48,000 a year, within an employment context based on tenure and seniority. But how about a difference between $45,000 and $85,000 within an employment context based on outcomes and merit? Finally, Greene and Winter insist on comparing teachers to other “workers.” I don’t want teachers considered as “workers”; the stakes are too darned high. I want teachers to be a hard-to-join elite group of high-skilled providers compared to doctors and bankers—and paid accordingly. My approach would vastly elevate the innovation within education by vastly elevating the job of “teacher”, which in turn would serve the needs of this country and its organizations by elevating the skills and competencies of students. Sadly, the loudest and most vehement opposition to this sort of plan would come from the teachers unions.

The Copycat Economy: A Sea of White

2007-02-07T11:08:00.000-08:00

The subtitle of my latest book is “How to Compete in a Copycat Economy.” When people ask me to explain the Copycat Economy, I often start talking about why markets have become so fragmented, why so many companies have seen their products become lower-margin commodities and why so many companies are frustrated that their services are being so blatantly imitated by competitors. Lately, I’ve gotten simpler. I talk about the Copycat Economy as a “sea of white.” I got this idea from a comment by Whirlpool’s former CEO David Whitwam. In trying to explain the financial and market stagnation of his company in the ‘90’s, his “aha!” moment came in a retail outlet in 1999. Here’s what he said: “I go into an appliance store. Now, I have pretty good eyes. I stand 40 feet away from a line of washers, and I can’t pick ours out. They all look alike. They all have decent quality. They all have the same price point. It’s a sea of white.” A sea of white. That pretty much describes things nowadays, doesn’t it? Here’s a little sampling of tidbits I’ve picked up in the business press just in the last month: • Starbury (among a growing crop of new competitors) is taking on Nike with a similar-looking fashionized basketball shoe—for $14.98. • New airline carriers like Eos, L’Avion, and Silverjet are offering overseas business-class comforts and amenities at bargain basement prices. • Other than biotech, the fastest growing part of the pharmaceutical industry over the past few years has been the generics business—the ultimate copycats. • Financier George Roberts of KKR says that it used to be tough to find the money to do deals in the past, but no more. Today, “finance is a commodity.” With the explosion of interchangeable hedge funds, private equity firms, international banking and financial institutions, and such, “I have never seen a time like this when money is as available and so global.” • As technologies improve and competitors multiply, the prices of flat-panel, high definition TVs, both plasma and LCD, have declined by 30 to 50 percent from one year ago. • Websites like WebMD and Steve Case’s new venture RevolutionHealth.com, are finding it necessary to offer more and more similar, and free, healthcare information and services in order to attract users.• Did you know it’s getting harder and harder to become a supermodel, or to make serious money as a big-time model? The reason, in designer Nicole Miller’s words, is because “there are so many models now. It used to be the Americans, Europeans and Canadians. Then we got the influx of Brazilians, Russians, and Eastern Europeans.” According to the Wall St. Journal, it’s a “deluge of fresh faces” that have created interchangeable bodies and siphoned off thousands of dollars from individual models’ annual compensationsOnly when Whitwam came to terms with the fact that his company was just another big white player in a sea of white did he begin to move Whirlpool in directions that violated industry convention and Whirlpool’s own culture and history—steps which led to new ventures, new partnerships, new hires, and ultimately, a series of high-tech, high-function, high-design, high-cool, high-unique products that finally gave the company some color. And higher prices. And more sales.

Andy Grove’s Job Description (Yours Too)

2007-01-26T11:08:00.000-08:00

When Andy Grove was running Intel, Intel rocked. Simple as that. He was a superb leader, one who (unlike too many CEO’s today) truly earned his multi-million dollar compensation package. What was the secret of his success? Many commentators have correctly pointed out his attributes of contrarian vision, non-politically correct candor, and unequivocal execution. Here was a guy who steered Intel away from its cash cow DRAM chips (which had become a low-margin commodity) towards high-growth microprocessors, who encouraged a culture of “constructive confrontation” rather than b.s. passive-aggressive politics, and who stayed personally engaged even to the point of working in an open cubicle. All true. But I came across a little tidbit which I think was instrumental in his leadership, particularly his ability to mobilize other people to strive for extraordinary goals—and this attribute is one which I think is essential for any leader today. Nearly four decades ago, Grove read a blurb which described the responsibilities of a film director. Even though directing a film and running a manufacturing company seem worlds apart, Grove glommed onto the article he read, copied the film director’s job responsibilities, and in 1969 he posted “My Job Description” on his office door. Here’s what it said: “A soother of egos, a cajoler of artistic talent…with the vision and force to make all these elements fuse into an inspired whole.” Brilliant. Even back then, Grove recognized that in running an organization, the leader who wants sustained competitive success can’t simply manage people with bureaucratic command-and-control techniques. The leader has to surround himself or herself with great talent, and then—using both imaginative vision and disciplined expectations—somehow coax and inspire those talented people to work together as a team in order to develop—and execute—cool technologies, great products, and superb services. The effective leader today is less of a mechanical “boss” and more of a conductor of a symphony or jazz band—someone who sees the big picture, points the way, integrates the talent, facilitates the work, helps people navigate the potholes, confronts the problems quickly, and revs up peoples’ excitement and commitment towards the end goals. The official job description you got when you joined your company is useful only if you want to survive. But if you want your career to thrive, Andy Grove’s job description is yours too.

The Real Clue to Innovation that Matters

2007-01-19T11:07:00.000-08:00

Every corporate leader nowadays seems to tout the value of innovation. Some companies get innovation right—Google, Apple, Target, and FedEx come to mind--but elsewhere, many leaders have failed to garnish the kinds of returns from innovations that they hoped for. One of the reasons, I’ve found, is that the innovations have little impact. They are innovations, to be sure, but they are often so incremental (slight improvement in current products and services) or so inconsequential (they don’t matter to customers and investors enough to generate a “gotta have it” buzz) that their impact is muted, sometimes irrelevant.. Innovations must have impact to generate noticeable returns. One of the best signs of serious impact is how much an innovation (pardon my French) pisses off competitors. I don’t mean “piss off” as in making competitors “concerned, attentive, anxious, puzzled or alert”. I mean “really riled up and angry”. That’s because true innovations disrupt established industry practices and conventional wisdom. They seriously threaten the status quo of how business is conducted and how customers are dealt with, which in turn means that competitors face the possibility that their size and sunk costs suddenly become liabilities, and their usual competitive responses (continuous improvement, more marketing, cost and quality initiatives, and such) will no longer suffice.. When Apple launched its iTunes platform and iPod hardware, incumbents in the music world were ticked off because they could no longer ignore the disruptive realities of online music and peer-to-peer file sharing. When Southwest Airlines launched its point-to-point, low-priced, employee-involved airline, the company was vilified by entrenched legacy players in the field. Plywood producer Columbia Forest Products is beginning to ramp up production, distribution and promotion of its new Pure Bond product line, and that really ticks off its competitors. Pure Bond reflects a truly disruptive patented technology. It is a formaldehyde-free product line in a market place where the plywood in buildings (including your home) has been manufactured (and still contains) formaldehyde—a.k.a. poison. As part of its move to become a “green” forest products company, Columbia is banking on the fact that demand can be spiked up by selecting distributors who “get it”, and when necessary, going straight to the end user (homeowner, architects, builders and such) with the simple message that unlike competitors’ wares, Columbia’s plywood is not soaked with a dangerous chemical. Would you pay a little more for that sort of product? If the example of Whole Foods Market is any benchmark, a lot of customers will. How do you think other players in the forest products space are reacting? How do you think Columbia is viewed in industry publications? How do you think Columbia people are treated in professional association meetings? (Hint: from what they’ve told me, not very nicely). My prediction is twofold: First, Pure Bond will take off just like the iPod and Southwest services took off—because at the end of the day, it doesn’t matter how competitors react, it’s how customers react. Two, like what happened in the wake of iPod and Southwest, competitors who manage to survive will try to copy Columbia. The challenge for Columbia is not to fear their competitors’ current wrath, but to fear the danger of complacency when formaldehyde-free wood eventually becomes conventional industry practice.

It Wasn’t Nardelli’s Fault

2007-01-09T11:07:00.000-08:00

So how can we make sense of the fact that Bob Nardelli—who doubled Home Depot’s revenues and earnings during his six- year tenure as CEO—was fired by the Board, and then given a $210 million goodbye kiss as he went out the door? There’s actually a rational explanation for this seemingly bizarre set of facts, but you wouldn’t know it from reading most analyses. Most explanations of Nardelli’s abrupt exit revolve around his leadership persona (imperial, distant, controlling) and his annual compensation package (obscenely large and seemingly uncorrelated to Home Depot’s stubbornly flat market cap during his reign). Undoubtedly these are important considerations, but they’re not sufficient explanations. After all, when it comes to critical financial metrics like revenues and earnings, Nardelli did well. And most of that $200 million severance package was built into his employment contract six years ago, so nobody should have been surprised. Here’s my take on what happened. From the very beginning, Home Depot’s Board of Directors screwed up big-time. First of all, Nardelli should never have been hired, regardless of the pay package. The Board got mesmerized by his stellar performance at GE, which was irrelevant. Nardelli ran GE Power Systems. He was a nuts and bolts manufacturing guy, an operations and processes guy, a B2B (business-to-business) guy who understood institutional customers like utility plants and factories. Home Depot is a retailer with customers like individual homeowners and small contractors. What’s retailing about? Ask the best retailers, like Bob Ulrich at Target, or Howard Schultz at Starbucks, or Hal Rosenbluth at the old Rosenbluth International travel empire. They’ll talk about things like customer service, design and colors, cool products, the look and feel of the physical facilities, and a vision of the intangibly great experience that the customer can always count on. They’ll go further and talk about highly-trained and committed employees, a culture that emphasizes innovative care on behalf of the customer, and information systems that permit faster and more personalized responses to the customer. Nardelli understood next to zero about that. He understood centralized controls to squeeze out low-hanging fruit of excess costs, he understood corporate-imposed systems like Six Sigma to improve quality and operational efficiencies, he understood high-level strategic planning to enter new markets like building supplies even as Home Depot’s big core business was fraying. Operational efficiency and cost reduction are excellent goals in any business, but the soul of retailing (and for that matter, most businesses) is about things like service, design, experiences, employees, unique vision and such. Under Nardelli, the health of all of those factors deteriorated, which is why same-store sales suffered, why so many customers defected, why so many front-line people were alienated, why many of the best managers left, and why competitors like Loew’s were able to capitalize at Home Depot’s expense. And that’s why Home Depot’s stock value stayed stagnant (in fact, declined) over Nardelli’s tenure, even as the S & P 500 rose 16% during that same time period. It’s not because he was autocratic or hard-ass; great leaders like Jack Welch and Steve Jobs have occasionally been described using those same labels, and besides, investors don’t care all that much about leaders’ personas. Investors are interested in one thing: future performance, and with cold, dispassionate eyes, they reckoned that even though Nardelli was able to squeeze out some laudable hard financials today, his persistent failure on the critical “soft” variables was setting up Home Depot for a big fall in the near future. I don’t blame Nardelli. He did what he’s capable of doing and what he’s always done. You don’t hire a Hall-of-Fame defensive lineman and ask him to dance ballet. I blame the board. They hired the wrong person, and compounded their error by offering him a ridiculous contract. Nardelli will now cry all the way to the bank, and then he’ll most likely supplement his golf outings with a lucrative position at a private equity firm which will properly channel his operational, distribution and manufacturing skills to the right venues. And hopefully, in seeking a new CEO, the Home Depot board won’t blow it a second time.

Built Right Into DNA

2007-01-03T11:06:00.000-08:00

Ten years ago I heard a banker say that the difference between someone who’s over 50 years old and someone who’s under 50 is that the former want the bank to mail them their cashed checks, and the latter just want fax or e-mail verification. Way before that, it was the older crowd that would bypass the ATM machines in order to stand in line for a “real” teller, while the younger crowd thought that it was pretty cool to just get cash real time. In today’s marketplace, youth drives the process, especially when it comes to technology. As I’ve pointed out in prior blogs, for the over-45 set the Web and related hardware is a fantastic add-on to our lives. For young people, especially those under 30, it’s not an add-on; it’s built into their DNA.My eleven year old received a Nintendo Wii for Christmas. Very cool product, filled with (for me) terrifying assembly instructions. My son relieved me of duty. He took the box downstairs, unloaded and assembled the contents, hooked the whole thing into a TV monitor, found some glitches, called tech support, worked it out with them, and now has a great theatre. He did it in half the time and one tenth the angst that I would have. I’m impressed. No, actually I’m in awe. But for him, no big deal. Readers of some of my prior blogs have chimed in. One wrote: "My oldest is 19 and I am 47. I read the Wall St. Journal almost daily. Occasionally I find articles that I think would interest him so, like most old folks, I hand him the article - usually I find the section of the paper on his bed room floor and I suspect unread. As an experiment I started sending him links to the same articles. Lo and behold these articles became the source of dinner conversation".Another reader wrote, in response to my (November 9, 2006) blog that explained why young people prefer Instant Messaging (IM) to old, stately e-mail: "It is easier for me to IM 3-5 people with the same question than scrubbing through a research report, weekly trade news, or my email box for an answer. I can present an easy or difficult question and immediately receive 5 high quality responses. You are exactly right in pointing out that the younger gen is accustomed to immediate feedback. It is a very collaborative dynamic that involves the diverse, fast-paced, and multi-tasking characteristics you identified."I experience information overload everyday and it is a serious problem. You should definitely understand this. The scale at which information is available now compared to 15 years ago is insane. IM-ing is a necessary and efficient supplement to achieving daily progress in the work environment".Big implications for marketing? Product development? Management? Life? You bet! 2007 is definitely a new world. Happy New Year!

Final 2006 Thoughts on CEO Pay

2006-12-28T11:05:00.000-08:00

The Hoover Institute’s Thomas Sowell is an economist who usually makes a lot of sense. And in his latest blog, he touches upon some uncomfortable truths about the media’s obsessive objections to high executive pay. He first points out data which show that 99% of people “can’t understand” how any executive can make $50 million in total compensation. Sowell’s response is: So what? He asks: “Do you understand how your automobile's transmission works? Could you repair it if something went wrong? Do you understand how aspirin stops headaches? How to make yogurt?” If we accept these gaps in our knowledge, says Sowell, why would we be troubled by not understanding complex economic processes which yield huge compensations for working executives? Sowell, in fact, goes further, arguing that the politically correct solution to this knowledge gap--more government oversight-- is economically unjustifiable. He notes that the typical solution is “that politicians should impose policies based on your ignorance of what is going on. Can you imagine anything more dangerous than allowing politicians to decide how much money each of us can earn?” And he correctly notes that when politicians replace free markets in determining pay, there is an inevitable rise in government corruption, bureaucracy, and intrusion, not to mention the ever-growing definition of who is “rich” and ought to be taxed heavily—all in the name of socially engineered “justice” which has had a terrible historical track record in other countries. All true. And yet, I think Sowell is missing something important. Another economist, Irwin Stelzer of the Hudson Institute, points out that the reason that the political atmosphere vis-à-vis “fair” pay has moved leftward is that “voters feel that the middle class, or the average worker, has not shared in the economic growth of recent years. Wages have not risen as fast as profits, and the recent spate of multi-million dollar Wall Street bonuses has caused many workers to figure that some financial high flyers make as much in an hour as they make in a year…..(And then) throw in tales of rigged corporate compensation through pervasive backdating of options.” Stelzer is right, and it doesn’t even have to be rigged. To quote the Wall St. Journal, even legitimate stock options have become simply “an additional form of pay slathered on top of already generous packages.” That leads me to one other factor. In my November 3 blog “Grotesque Thoughts About Grotesque Pay”, I noted the persistently lousy correlation between executive pay and corporate performance. When people read about CEO’s raking in millions while their companies lose billions, those peoples’ perceptions about executive pay sour, even if they—to use Sowell’s words-- “don’t understand” complex economic theory. Never underestimate the voice of the marketplace. Managers, consumers, investors and just plain citizens often form opinions without fully understanding all their underlying dynamics. That’s life, that’s democracy, that’s capitalism. Messy and unruly, but effective. When it comes to CEOs’ pay, I believe the good ones deserve every penny of their millions, the bad ones ought to be ashamed of their obscene contracts (and shamed publicly), and the rest of us shouldn’t be afraid of analyzing, commenting, and evaluating on the subject. With that in mind, as 2006 comes to an end, I hope you’ve had a great Channuka and Christmas, and I hope that your compensation will rise in 2007.

Lessons From a Disappointing Merger

2006-12-22T11:05:00.000-08:00

Last week I described a company which did an acquisition that looked great on paper but failed in practice, and the CEO wanted to know why, and what he could learn to avoid the same mistake in the future. My partners and I discovered that the acquisition made sense logically and financially. It didn’t make sense culturally. The cultural "fit" was awful. We proposed several recommendations which are applicable to any company. In the interests of space and confidentiality, I’ve selectively chosen and then condensed them to form the following list: • In any acquisition, do not underestimate the cultural integration challenge. • What happens after the deal is inked can make or break the strategic and business logic behind it. • The acquiring firm must develop a realistic and specific plan for the integration challenge before inking the deal.• Before a deal is finalized, due diligence should include the “fit” for cultures, values, management styles, how business is conducted, and the personal and professional goals of the key players in the acquired firm. The investigation should include a checklist for data and evidence to look for. • If, after all this work is done, there is serious reservation about the cultural fit between the two companies, don’t do the deal, even if the numbers look attractive and even if the deal looks sexy on paper. (This, by the way, is the “M.O.” of companies like Cisco Systems and Washington Mutual, which have a higher-than-average success rate with their acquisitions). • If, after all the above is done, the acquiring company still has screwed up and purchased a company with a lousy fit, then it’s time for the leaders in the acquiring company to make tough decisions. One decision is to cut bait and divest the acquired company before the inevitable bleeding progresses. The other is to ratchet up the controls: unapologetically define the values, behavioral, and performance expectations for everyone affiliated with the firm (including the people that were acquired), accelerate cultural training, development and formal coaching/mentoring initiatives for members of the acquired firm, launch regular “cultural exchanges” between members of the two firms, prominently reward those who get on board, and prepare clear management directives to resistors and skeptics to either change or move on—and make sure those directives have “teeth”. The worst thing to do is to sit back and hope that the problem will somehow resolve itself over time. Had Company X taken the above steps, it would have substantially improved the odds of success for the deal. It would have been much more likely to have realized the projected gains which seemed so reasonable and exciting when the deal was originally done.

"A Disappointing Merger"

2006-12-13T11:04:00.000-08:00

I just wrapped up an interesting project with colleagues from an investment bank. We were asked by a CEO of an able and healthy company to analyze why an acquisition which looked so good on paper five years ago bombed so badly in practice. Apart from protecting confidentiality, I want to assure you that the name of the company in question, and the financial specifics of the deal, are irrelevant to the learning points that my colleagues and I unearthed. As it turns out, the economics of the deal were sound. The price was good, the legal and structural issues were handled well, and the strategic rationale was solid. No problems before the documents were signed. The problems began afterwards. It turned out the gross cultural mismatches between the two firms pretty much overwhelmed and negated the financial and strategic advantages underlying the acquisition. Basically, what happened was that the key players in both companies had vastly different perspectives on how they ran their businesses, how they managed for growth, how they dealt with customers, and what they defined as appropriate corporate values. Even though the acquisition was not ever called a “merger of equals” (no acquisition ever is, regardless of the spin), the acquiring firm simply could not dislodge the cultural legacies and resistances within the acquired firm. How could Company X, which acquired Company Y, not have seen this train wreck coming? The reason is that the capable people on both sides who originally put together the deal were primarily “numbers” people. They focused their due diligence and preliminary analysis almost entirely on the financials and “big picture” strategy. Though they wouldn’t admit it, some of them ignored the cultural integration issue altogether, and the others naively assumed that things would somehow work out or that "staff" would figure out how to make the execution happen. Company X is certainly not unique. All too often in the M & A arena, these “soft” cultural issues are given short drift by dealmakers, and then they come back to haunt the marriage partners—in a “hard” way. Don't make the same mistake. That's the first, and most important, lesson. Next week I’ll tell you what we suggested to the CEO and the executive team.

Indigestion at US Airways

2006-12-05T17:38:00.000-08:00

So US Airways Group is trying to take over Delta Airlines. As someone who studies mergers (and who flies a lot), why am I not reassured by this deal? Here are a few reasons:

1. US Airways Group is an amalgam of America West and US Airways, but America West and US Airways are still digesting each other. And now they want to devour another huge meal at the same time? I foresee some big competitive indigestion.

2. The America West/US Airways merger has been “successful” inasmuch as the new company has slashed costs so much that it might post a profit in Q4. But in the process of eviscerating resources, customer service problems have (unsurprisingly) multiplied. Upshot: Once the low-hanging fruit of obvious excess costs has been fully harvested, how are the leaders going to profitably grow the company when more customers are unhappy?

3. The answer to question #2 seems to be: Hell, I don’t know, so let’s buy another airline and use synergies to slash more costs. But the track record of companies whose growth strategy revolves primarily around serial acquisitions is pretty poor. Without a solid “organic” grounding of cutting edge services, brand uniqueness, and customer loyalty—none of which seem to be in abundance at US Airways Group-- it’s unlikely that serial acquisitions will, long term, yield much more than a house of cards.

4. I get the sense that the leaders behind the deal confuse “being the biggest” (and the new company would be the biggest U.S. airline) with “being the best.” If being biggest was the magic secret, you’d want to have invested in GM rather than Toyota, or in Albertson’s rather than Whole Foods Market—or in Delta and US Airways rather than Southwest Air and Jet Blue. Wrong.

5. It’s a hostile bid, in a business that requires resources and employee commitment to cost containment, quality enhancement and face-to-face customer care. Enough said.

6. Most important, let me quote from my book Break From the Pack, the subtitle “The Dinosaurs Mating Syndrome”:

“Perhaps the greatest delusion executives have about mergers is the belief that somehow, two bureaucratic, backward-looking corporations will join forces and spawn an impregnable giant. The underlying assumption is that two companies that have individually managed to generate flat earnings and declining share will be able to magically continue their comfort-zone strategies by jumping into bed together… Ultimately, a merger might temporarily prop up any two beasts by providing them better scale and better marketing, but the end result is still extreme vulnerability, if not extinction.”

Well, as the holidays approach I don’t mean to sound like a Scrooge, but I do believe I’ve answered my original question.

The Trouble With Yahoo

2006-11-28T17:37:00.000-08:00

I like Yahoo. I check the website fairly regularly for news, finance, weather, local films and such. I even have one of my e-mail addresses on its domain. So you’d think I would have had a sentimental attachment to the company when I wrote my most recent book. Yet there are very few references to Yahoo in Break From the Pack.

The reason is because I find the company’s strategy to be fundamentally flawed. Under CEO Terry Semel, Yahoo has been trying to be a digital “one stop shopping” information and media center. Yet as I point out in my book, when companies try to be all things to all people, their resources get stretched thin, they lose focus in mission and capital allocation, they confuse people with too many “priorities”, they ultimately blur their brand, and most important, they find it much more difficult to dominate any sector of the markets they compete in. In fact, I argue that the most successful corporate strategies follow a variant of the “Powell Doctrine” which has been successful in the military theatre: Choose your battles very selectively, and then go in with overwhelming force. The goal, regardless of your corporate size, is domination. You can’t dominate anything if you’re trying to be great in everything. Indeed, chapter 6 is called “Dominate or Leave”, which means if you can’t realistically hope to dominate a particular market regardless of your initial size (like Whole Foods did in natural foods, Jet Blue in low price airline travel, and Google in search), then avoid it altogether, or if it's already on your books, bite the bullet and exit it even if it’s currently bringing in top line revenue.

The lead article in the November 18 Wall St. Journal describes an in-house memo by senior VP Brad Garlinghouse which apparently has become a manifesto within the company, and which vindicates my position. Yahoo may still be the most visited website in the U.S., but, as the Journal notes, it “…has suffered from slumping shares, slowing revenue growth, staff defections, and a delay in a crucial project aimed at boosting online ad sales. (Further), the company has been outmatched in key areas such as search advertising and social networking.”

So here comes Garlinghouse with his “Peanut Butter” memo. Arguing that Yahoo is spreading its resources like peanut butter on bread, thinly and evenly across all activities, Garlinghouse concludes that “thus we focus on nothing in particular.” His advice to his company: “Pick specific areas to focus on and make bigger bets on them while dropping nonessential activities.”

The Journal notes further that the memo identifies “…the absence of a focused, cohesive vision, which means (Yahoo) wants to do everything and be everything to everyone…. The result is a company that is reactive and scared to be left out (of anything).”

I read Garlinghouse’s original lengthy memo on the Web and in many spots found it to be as unfocused and uncohesive as he accuses Yahoo’s strategy of being. But once you get past the overgeneralized consultant-speak, the underlying message is worthy of consideration. That’s why the memo has resonated with many Yahoo managers. Even CEO Semel now says “We’ve got to get back to basics and again zero in on a few key priorities.”

But when you’ve already built a corporate mindset, infrastructure and personnel roster than revolves around one stop shopping, Semel’s insight is easier said than done. That’s where leadership comes in. Let’s see what happens next at Yahoo.

The Pendulum in Latin America

2006-11-24T17:37:00.000-08:00

I just got back in time for Thanksgiving. I was in Mendoza and Buenos Aires, Argentina for a week, giving public seminars. I go to Latin America fairly regularly on business and pleasure, and I love it. Maybe it’s because I speak Spanish, maybe because the people are so gracious. I don’t know, but from the Mexico-U.S. border down to the Tierra del Fuego of Chile and Argentina-- it’s a great continent.

And it’s a continent that deserves a far higher and more stable economic status than it has had. With a few exceptions, countries in Latin America have for years suffered economic dislocations peppered with political chaos.

Many experts have attempted to explain why with detailed analysis and documentation. My own theory is simpler. I see Latin America as weighted by a metaphoric pendulum that swings wildly back and forth, left to right to left to right……

See, the right wing in Latin America (like the corporate moguls who have cozy relationships with protectionist government officials, the landowners and financiers who enjoy riches and power, etc.) is primarily concerned with hoarding and protecting wealth. The left wing (like old fashioned socialists, communists, Peronists, unionists, etc.) is primarily concerned with dividing and redistributing wealth. One wing gains power for a while, the economy goes south, and then the pendulum swings and the other wing gains power, and the economy goes south some more, and then the pendulum swings back to the first group, and so on—with the inevitable political instability that accompanies such pendulum gyrations. Right now, as seen by the examples of Venezuela, Bolivia, Nicaragua, Brazil, and Paraguay, the pendulum seems to be swinging left again.

But right or left wing yields economic stagnation, because both wings are working off a premise of established wealth. One group wants to protect it, the other to divide it. What’s missing is a wing that is primarily concerned with creating wealth. To create wealth, you need more than political democracy. You need fiscal and monetary policies that encourage growth. You need laws and institutions that honor contracts. You need accounting systems that track the flow of money honestly and accurately. You need capital access that encourages property ownership, entrepreneurship and R & D. You need an environment where it’s possible to start a business without a crushing burden of paperwork, rules, and regulatory hurdles. You need a business culture where merit and effort are more important than family ties. You need government oversight marked by a minimum of graft and corruption. You need an aggressive attack on government protectionism that currently exists with many entrenched, complacent, arrogant companies. You need leaders who champion free markets as well as free elections.

When that happens on a continent-wide, institutional basis, the pendulum will finally stabilize, and Latin America will achieve the potential is richly deserves.

The Hellacious Peril of Being a Customer

2006-11-15T17:36:00.000-08:00

Last week my assistant had a problem with our phone system. Nothing serious, just a little glitch with a voicemail function. She had a quick technical question and, as she told me, once she received a quick answer from someone at the phone company, she could take care of the problem herself. So she called the phone company and of course was immediately thrown into the dark labyrinth of telephone hell. After several frustrating attempts to connect with a human being, and even more frustrating interminable waits while the damnable “please stay on the line, we value your call” sentence came up over and over, she hung up and confessed to me that she didn’t know what to do.

Being the wise sage that I am, I knew the answer. “When you descended into phone hell,” I said, “you obviously were presented with a menu of options.” She nodded.

“So which option did you pick?” I asked.

“First I tried ‘service’, then I tried ‘technical support.’” She said.

Now, that would be a very logical and rational step, and an honest one, but of course it would be futile. Here’s what I said: “You’re choosing the wrong option. Choose anything that sounds remotely like ‘new subscriptions’ or ‘to speak to a salesperson’.”

“But why?” she inquired. “I don’t want to speak to a salesperson.”

“Yes you do. Because if you choose ‘service’ or ‘technical support’, they know you’re already a customer, and they don’t care about existing customers; you’re already on the hook. And they don’t want to invest in after sale service, either, because that costs money and they need to maniacally build new sales to subsidize the mega-mergers that are bleeding them. So trust me. Call ‘sales’. You’ll get a response there pronto.”

And so she did. Within seconds a real human being answered, and quickly patched her to the right person, who quickly addressed her question, and that was the end of that. And the best thing was that my assistant looked upon me with awe rather than her usual disdain.

Small wonder that I have no loyalty to my current phone provider, and am seriously considering alternatives. My assistant's experience reminds me of this old joke:

A guy dies and goes up to the pearly gates. St. Peter tells him: “We’ve got a backlog of cases to process. So I’m going to give you a key to heaven and a key to hell. You visit both places, then come back and tell me where you want to go.”

So the guy first checks out heaven. Lovely. Serene. Soft music. Quiet conversations. Good books.

Then he checks out hell. Wow—beer, babes, hunks, beach volleyball, rock and roll, sexy dancing, party party party.

So the next day he goes back to St. Peter and says. “You know, heaven is nice, but kind of dull. I think I’ll go to hell.” Fine, says St. Peter, and fills out the necessary paperwork.

But when the guy reaches hell, he’s grabbed by two demons who drag him into a fiery abyss. No beer, no babes. Just a lot of moaning and screaming all around. As he’s dragged off, he yells out “What happened? Where’s all the parties? What’s going on?”

“Ah”, replies one of the demons, “you see, yesterday you were a prospect. Today you’re a customer.”

E-Mail is So Yesterday, and Other Tales of Youth

2006-11-09T17:35:00.000-08:00

When Yahoo was in negotiation to buy Facebook for hundreds of millions of dollars, 22-year old Facebook founder Mark Zuckerberg could not confirm attendance at one important 8 a.m. conference call because he would be asleep at that hour. Another time, after spending a few hours with Yahoo people at a critical meeting, he abruptly got up to leave because he said he had to pick up his girlfriend at the airport.

Most grizzled businesspeople would conclude that Zuckerberg is a flake, a psycho, or snotty punk, but I think he, like many people his age, simply see the world differently and operate accordingly. If he’s launched a company like Facebook at just 22, he’s clearly not a bum. A colleague tells me that the hardest adjustment for his 21 year old son, who had just gotten his first full-time “adult” job writing code for a software company, was that he “had” to be at work at a designated hour. After months, he still hasn’t fully adjusted. He (and Zuckerberg) often work late into the night, so why would a company expect them to wake up early and show up for work early in the morning at the same time, every day? And if Zuckerberg is working maniacally on a 7/24 basis, why wouldn’t he want to grab the fleeting opportunity to see his incoming girlfriend for a day or two? I’m not “condoning” his behavior. But I am acknowledging that these are interesting questions.

Along these lines, I read an interesting article by Associated Press writer Martha Irvine, who began her piece with: “E-mail is so last millennium.” Turns out that “young people (18-25) see e-mail as a good way to reach an elder—a parent, teacher, or a boss.” But otherwise, they’d rather communicate via Instant Messaging (I.M.), digital chat sites, and interactive internet communities like Facebook and MySpace.

Just for the heck of it, I asked my oldest kid—all of 11 years old-- if he ever uses e-mail. “Only if I have to send an attachment,” he replied, “or when I write you.” Ouch. He confirmed that he leans towards I.M. and was both surprised and disappointed to learn that I was aware of Facebook and MySpace.

My meandering thoughts lead to one conclusion: If “elder” businesspeople are to attract the next generation of customers (and keep in mind that these 18-25 year old “kids” have more than $200 billion in spending power)-- and if they want to attract the next generation of best and brightest employees, they’d better prepare for the fact that these youths are wearing glasses with a somewhat different prescription.

The new generation of “young adults” has these characteristics:

• Diverse (one in three is not Caucasian)
• Fast-paced
• Multi-taskers
• Entertainment-driven from numerous sources, often simultaneously.
• Tech-savvy (For ancient 45 year olds, technology is a great add-on to their lives; for 20 year olds, it’s in their DNA)
• Global perspective
• Self-assured
• Accustomed to immediate feedback
• Skeptical; they have a high b.s. meter
• In business, they’re driven more by meaning and causes rather than by conformity to organizational rank and rules. In the former condition, they’re capable of prodigious work at all hours. In the latter condition, they’re capable of surprising passivity and unabashed bolting to another company.

If you’re an over- 30 geriatric and you deal with the next generational wave of adults the same way you deal with people your age or higher, you probably are doing so at your own peril.

Grotesque Thoughts on Grotesque Pay

2006-11-03T17:34:00.000-08:00

In 1970, the ratio between CEO pay and regular-Joe pay was 28 to 1. Today, the average annual CEO pay ($10.5 million) is nearly 400 times that of the average employee’s pay ($28.5 thousand). The main reason that this ratio is disgraceful is not because of the vast disparity per se, but because so many CEOs’ performance is awful and they still make out like bandits. Few people begrudge the mega-compensation of Bill Gates and Michael Dell because those two built their companies (Microsoft and Dell) from scratch and created vast sums of wealth for so many employees and shareholders. Few people begrudge the mega-compensation of Steve Jobs and Carlos Ghosn because those two turned around their companies (Apple and Nissan) so dramatically.

The moral tragedy occurs when so many CEO’s who aren’t entrepreneurs, but themselves basically employees of the company (sometimes diplomatically called “professional managers”), wind up with millions every year even while their companies’ stock, performance, and morale sags and plummets.. Even when (or if) these poorly performing employees eventually get booted for ineptly diluting market caps and brands (like ex-CEO's David Pottruck of Schwab or Carly Fiorina of HP), they still walk away with literally tens of millions of dollars. How’s that for punishment? Or if that sticks in your craw, consider William McGuire, who was basically forced out of his CEO position because of some creative accounting irregularities, and walked away with a punishment of over $1 billion. Is there something wrong with this picture?

A recent BusinessWeek article lamented the accelerating exodus of CEO’s. In 2005, a record 1,322 CEO’s left their firms under duress. The track record of 2006 is on pace to exceed that number. BusinessWeek admits that “it’s hard to feel sorry for CEO’s when they take home at least 300 times what the average worker makes each year”.

Know what I think? These two disturbing trends—accelerating pay disparities and accelerating CEO exoduses—are becoming increasingly intertwined. In response to the growing pressures of today’s uber-competitive marketplace, many companies and investors are forgetting the concept of “patient capital”. They expect and demand fast results. CEO’s, therefore, are now demanding ever higher pay to buffer themselves from the consequences of failure and dismissal; in fact, they’re negotiating contracts that provide them with explicitly enormous sums of money in the event that they do fail. (Check out Robert Nardelli’s obscene contract at Home Depot; apart from his mind-numbing compensation while Home Depot continues to lag below expectations, some analysts who have examined his contract have suggested that he’d be even better off if he was booted out for lousy performance than if he actually succeeded).

Further, many CEO’s in this “hurry up and succeed” environment make myopic, self-serving decisions that ultimately wind up hurting rather than helping their organizations. And as I’ve shown in some of my prior articles and books, CEO’s whose primary focus is on pleasing investors and their boards are less likely to produce sustainable and sound financials than are the CEO’s whose primary focus is on pleasing customers and employees.

There are plenty of CEO’s who refuse to play the “quick fix” game, and who refuse to grotesquely fatten their pay packages regardless of the status of corporate performance and espirit d’corps. CEO’s like John Mackey and John White have founded and guided their companies (Whole Foods Markets and Public Financial Management) to steady, employee-driven, profitable growth for years and they take home annual pay that is less than 30 times that of their average front-line employee’s.

But overall, the problems still exists. And they seem to be getting worse. Jack Welch says the way to fix things t is for boards to start acting responsibly when they negotiate CEO pay packages. Okay, let’s start holding some feet to the fire.

How Dead, or Alive, is YouTube Now?

2006-10-24T17:33:00.000-07:00

Last week I discussed the Google/YouTube deal and concluded that while it had some noteworthy flaws, the pluses outweighed the minuses. Then, after posting the blog, I read an interesting article by Peter Hartlaub in the San Francisco Chronicle. Entitled “Is YouTube Dead?”, Hartlaub argued that when button-down corporate types with big bucks take over wild, zany, iconoclastic outfits like Napster, MySpace, or YouTube, you can bet that the party’s over and the wildly creative, audacious spirit that attracted the Daddy Warbucks in the first place will be slowly euthanized. Reminds me of that old song about what happens after the wedding: Big Bad Bill is Just Sweet William now.

Is Hartlaub overly paranoid here? Maybe, because Google’s founders appear to be fairly wild ‘n’ crazy themselves. On the other hand, he’s got a point worth considering. Too often, I’ve seen big Wile E. Coyote corporations who have lost the capacity to innovate buy up small, imaginative Road Runner companies, and then slowly strangle the latters’ spirit with bureaucratic sclerosis. Google is different because it’s still quite innovative, but as a multi-billion dollar publicly traded corporation, it will be interesting to see how it “manages” and “smooths over” the lawless edginess of YouTube. And it will be doubly interesting to see how many YouTube fans wind up defecting to other (yet unborn) more maniacal (less “commercial”?) sites over the next few years. (Already, thousands of clips are being destroyed because of possible copyright infringements; a prudent legal maneuver, to be sure, but does it support Hartlaub’s premise?)

One other thing. Regardless of how similar the Google and YouTube corporate cultures might be, and regardless of the good intentions of both parties, it is damn difficult to integrate any two organizations in a way that 2 + 2=7. The executives, consultants, lawyers and investment bankers who typically cut deals are financial and legal experts who often have little interest in these integration matters. When pressed, their responses often reflect a naïve assumption that somehow the acquiring company’s overworked staff will make it all happen. But even if the two company cultures have similar values, it’s still a formidable challenge to synthesize two complex sets of systems, products, people, and attitudes.

I’m not saying the Google/YouTube deal is therefore a stinker. On the contrary, I stand by my conclusions of last week. But I want to acknowledge Hartlaub for suggesting a valid point: mainly, that things may look great on paper, but they change after an acquisition, and sometimes not in ways that were anticipated, or desired. Let’s revisit YouTube after a couple years and see what it looks like, and let’s see if there are new outlaw competitors who have taken over the buzz and the growth.

Is the Google/YouTube Deal a Star or a Dog?

2006-10-18T17:32:00.000-07:00

When Google bought YouTube for $1.65 billion in stock, the press predictably went into a frenzy. But in analyzing any acquisition, it’s important to get past the hype, because well over half of mergers and acquisitions (M & A) wind up destroying shareholder value.

In my new book Break From the Pack, I present a “6T Blueprint” for making acquisitions that will help an organization become more successful, not simply become bigger. Let’s examine the 6 T’s and see how the Google/YouTube deal fares.

1. T1=Tomorrow. Does the acquisition position the new (combined) company for success in tomorrow’s playing field; that is, in emerging, fast growth businesses that will define tomorrow’s marketplace? This is an important question. If an acquisition primarily improves the economies of scale of current processes, or cross-marketing opportunities of current products, or the share of a current market, it’s likely to have lousy long-term value. In other words, if Google had acquired YouTube simply to gain access to its 100 million video clips and its 50% share of the online video market, it would have been a poor decision. In fact, I give Google fairly high marks on T1, because the company sees the "tomorrow" possibilities. The online video market might well be the next evolution in news, entertainment, and possibly the Internet itself—and Google is now positioned to innovate it and dominate it now that it has collared the hottest brand and the strongest online video community.

2. T2=Top Technology. Does the acquisition allow the acquiring company to obtain a specialized or new proprietary technology that offers measurably quantum improvements in response time, customer care, product innovation, and penetration into tomorrow’s market? I give Google low marks on T2. There’s nothing particularly earthshattering or proprietary about YouTube’s technology. If anything, it’s Google’s technology that will give bigger scale, better search capabilities, and newer application to YouTube’s.

3. T3=Top Talent. Does the acquisition bring in an abundance of top talent people who possess genuinely state-of-the-art, cutting edge expertise and experiences. The answer is no. Google didn't need YouTube for unique talent, nor did it get unique talent. T3 is another mark against the deal.

4. T4=Turbo-Time. There are two parts to T4. First, will the acquisition make the new company faster? (All too often, acquisitions make the new company slower and more sluggish). On T4, I give Google a so-so because I don’t think the new company will be any faster or any slower. The second part of T4 is: Will the newly acquired company be absorbed and integrated quickly. Here, I rate Google higher. The two companies are neighbors, their cultures are similar, and they’re integrating intangibles rather than huge factories and distribution systems scattered around the world. The integration should be relatively smooth, though keep in mind that other Web acquisitions, like ETrade/harrisdirect and Ameritrade/TDWaterhouse have proven far more complicated and difficult than originally anticipated.

5. T5=Titillation. Does the acquisition create products and services that delight customers, that make them say “Wow!” Yeah, I’d say definitely. Google can now offer a search capability for a big, ever-expanding bunch of cool videos to complement its presence in data and text. (Too often, acquisitions generate products and services that are “me-too” commodities. Not so here).

6. T6=Tiny. Is the acquisition small? The research indicates that the larger the deal, the more likely it’ll fail. The smaller the deal, the more likely it’ll be easier to execute, and the more likely it won’t slow down the company, or lock it into a “today” position (rather than tomorrow), or devour its resources. It’s also more likely to be done for the right reason: to fill in a small strategic gap or hole rather than be a giant panacea for management that hasn’t a clue on how to grow the company organically. So how does Google fare? Hard to say. Relative to its $100 billion plus market cap, it’s a small deal. Relative to its $6 billion revenue, it’s not a small deal. I tend to be conservative and reference revenue, because revenues reflect the daily reality of the company more than market cap valuations which can be unrealistically inflated (remember how AOL bought Time Warner with its hyper-inflated stock right before its company’s stock crashed?) Nevertheless, since the deal was strictly stock, the collateral damage might be limited. Upshot: I give Google a so-so on T6.

Put it all together and we have a high score on T1 and T5, an okay or so-so score on T4 and T6, and a low score on T2 and T3. This means that the deal probably won’t be a failure, it might even be a genuine success, and it most likely doesn’t justify the fawning, breathtaking analyses that have accompanied it this month.

Patricia Dunn, L.I.P.

2006-10-12T11:06:00.000-07:00

No, that’s not a typo. It’s L.I.P as in Live in Peace as opposed to R.I.P. Rest in Peace. And that’s what I wish for HP’s beleaguered ex-chairman and ex-board member. But before I get into that, I want to follow up on last week's blog ("Much Ado About the HP Board") and contemplate the so-called “scandal” that continues to rock the company.

Very simply, here’s what puzzles me. George Keyworth, the (now ex-) director who apparently did the leaking—he’s not the one that the press and the politicos are focusing their wrath on. Tom Perkins, the director who pushed Dunn to find the culprit, then pushed back at Dunn when his buddy Keyworth turned out to be the leaker—well, he’s also not on the hot seat either. (In fact, he wasn’t even fired from the board; he quit). The legal beagles at HP, who were kept appraised by Dunn but never made a big stink about her actions—they’re legally free and clear. And CEO Mark Hurd, who apparently knew a fair amount about what was going on—he remains, albeit embarrassed, the home-town hero. But it’s Dunn and Dunn alone who was summarily drawn and quartered and is now facing multiple criminal indictments by the California attorney general. Am I missing something about justice here?

There may be legitimate reasons to criticize Dunn’s overall performance as Chairman of the Board, but that’s not what’s at stake here. Dunn was not doing a Nixonian secret “enemies list” that undermined the integrity and stability of the entire corporation. The fact remains that she was doing the board’s bidding when she approved an investigation to determine who was leaking private information to the press. The directors were very clear: they wanted action on this problem, and they wanted results. Patricia Dunn earnestly tried to “fix” the problem by hiring investigators who used questionable and unethical means to find the culprit. She admitted her poor decisions (unlike Nixon) right away; and yes, she should have been reprimanded, there ought to have been some mea culpas and apoligies, and she should have stepped down from here Chairman position yet remained on the board. In other words, the press shouldn’t be sensationalizing this story and no heads ought to actually roll for it. But if they do roll, why is it only Dunn’s head that’s on the platter? Am I missing something about justice here?

Meanwhile, while all this is happening, Dunn is fighting her third bout with cancer and says she hopes to live to clear her name. I hope she does both. That’s why I say: Patricia Dunn. L.I.P.

Much Ado About the HP Board

2006-10-03T10:46:00.000-07:00

The business press loves a sexy story that it can milk indefinitely, and I guess the HP board of directors provided just the right fodder. Without rehashing the gory details, the bottom line is that a few board denizens, including now-ousted Chairman Patricia Dunn and current CEO Mark Hurd—approved some questionable, stupid, and probably illegal tactics in order to figure out which board member was leaking private board information to the press.

Okay, so it was a bit sleazy to hire private investigators to pretend to be board members calling the phone company in order to get copies of the (real) board members’ phone histories. But a “scandal”? Come on. This isn’t Enron with its off-balance sheet partnerships and fraudulent pronouncements to the investment community. It’s not the tobacco chiefs insisting under oath that their products were safe even as their own in-house data showed otherwise. This was a clumsy, Inspector Clouseau-type attempt to achieve a (legitimate) goal of plugging up leaks of (legitimately) private board conversations. Patricia Dunn is a very earnest person who was charged with finding out where the leaks were coming from, and she took her charge to an unfortunate extreme.

I suppose it makes sense that Dunn was dumped as Chairman, though the fact that she was so quickly tossed off the board altogether makes me wonder if she’s being unfairly targeted as the one and only scapegoat. (Remember, she refuses to take full and sole responsibility for this sordid little case).

But at the end of the day, who cares? It’s not like consumers, investors, and the capital markets were damaged. Some bigwigs on the board were embarrassed, and the company got some well-deserved egg on its face. But when a New York Times headline asks “As Scandal Unfolds, Will Customers Care?”, the answer is obviously, and rightly, no. The company’s product lines remain solid, customers see no reason to defect, and Mark Hurd—who admittedly doesn’t come out spotless in this somewhat seedy little tale—still deserves a lot of credit for cleaning up Carly Fiorina’s mess and raising HP’s stock price 72%--a level that’s held steady since the story broke.

Here’s my prediction: after some more posturing by bloviating politicians, the story will fade into oblivion, the small civil suits will be quietly settled, the HP board will become squeaky clean, and the press will move on to the next big non-thing.

Choose Your Customers Wisely

2006-09-19T17:15:00.000-07:00

These four powerful words were uttered by a student in my Executive MBA course. Break down the underlying messages in this phrase and you’ll have some powerful tools to help your organization compete effectively.

1. Choose your customers. There's no law that says you have to accept every customer. In other words, not everyone ought to be your customer. If you’re in the business-to-business space, corporate customers who pay your bill on time and have been with you the last ten years are not necessarily good customers. They might consume an inordinate amount of your time and resources before they’re finally grudgingly satisfied. They might constantly play you off other vendors to press you to lower your price. They might frequently threaten to leave unless they get better terms, regardless of the impact on your organization’s health. In short, even though they pay on time and have been with you for years, they might be lousy customers. FedEx, for example, did a Return-on-Investment analysis on their corporate customers and found a shocking allocation of the company’s resources to marginal customers. The moral: Don’t just automatically take on any customers who are willing to buy just to beef up your top line. Selectively choose your customers, because ultimately it’s bottom line metrics that will determine your organization’s health. In fact, as plastics manufacturer Nypro found, firing marginal or bloodsucking customers is the best way to grow your business with the kinds of customers who are willing to pay for innovative value.

If you’re in the business-to-consumer space, you might still have the luxury of choosing your customers, like banks and dentists do. If you do have that luxury, don’t apologize for it. Or, minimally, if you can’t pick and choose, then at least discriminate among customers. Pamper and reward your “good” ones. Make them feel special. Don’t apologize for it.

2. Choose your customers wisely. Choose customers that “fit” your values and your growth strategy. If you’re seeking transparent collaborative relationships with corporate customers, don’t accept those who are closed or untrustworthy. If your business plan calls for higher-end value-adding services, don’t choose or try to please customers who are attracted to commodity services at basement prices. If you’re in the business to consumer space, target your marketing primarily (or only) towards the kinds of customers that fit your growth plan, and make sure that you take special pains to make them feel welcome and desired. Anyone can walk into a Best Buy store. But consistent with the company’s new growth strategy, CEO Brad Anderson told store managers to reduce their attention on promotions, rebates and gimmicks that would attract lowest-price customers, and instead concentrate their attention on providing more service value to higher-end “angel” customers. Anderson figured out that his company would be more focused, less distracted, and healthier without also seeking low-price customers who would be better served by Wal-Mart, where their inclinations fit the latter retailer’s strategy.

You hire and fire employees as a good business practice. Why not customers? Moral of story: Choose your customers wisely.

Globalization is a Good Thing (Isn't It?)

2006-09-19T10:45:00.000-07:00

Ralph Peters, writing in the Sept. 4 issue of The Weekly Standard said something provocative:

“Globalization is real, but its power to improve the lot of humankind has been madly oversold. Globalization enthralls and binds together a new aristocracy--the golden crust on the human loaf--but the remaining billions, who lack the culture and confidence to benefit from "one world," have begun to erect barricades against the internationalization of their affairs. And, from Peshawar to Paris, those manning the barricades increasingly turn violent over perceived threats to their accustomed patterns of life. If globalization represents a liberal worldview, renewed localism is a manifestation of reactionary fears, resurgent faiths, and the iron grip of tradition.”

Though I’m an affirmed globalist (for the simple reason that technological advance has clobbered time, distance and national boundaries) , I must concede that Peters has a point. For the individual firm, the potentials of global connectivity in developing expanded information, new customers, dynamic partnerships, research and development breakthroughs, and cost efficiencies is immense. Proctor and Gamble is successfully partnering with R & D talent abroad and anticipates that 50% of its new product development will come from outside the U.S. by 2010. Public Financial Management, with under $100 million in revenues, is offshoring a lot of routine financial data entry work to free up resources that can be applied to the company's customers. I recently gave a speech to 400 small business owners and entrepreneurs, and one of my main points was that with the availability of new technologies and strategic alliance opportunities, every company ought to consider itself a global company and look beyond domestic borders for growth potential.. Any company that doesn’t, by the way, will be fodder for firms outside the U.S. who do. Globalization is inevitable, and the savvy leader will seek to capitalize on it, not pretend it doesn’t exist.

And yet, when it comes to nations themselves, the reality is more complex. In the long run, the impact of globalization is solidly beneficial. Empirical economic data are unequivocal about this point. In fact, countries that have attempted to put a brake on this process with tariffs, quotas, trade barriers and other forms of protectionism have consistently generated economic stagnation.

But on the flip side, the “trickle-down” benefits of globalization might indeed, in the short run, be just a trickle.. In both rich and poor countries (including the U.S.), local traditions and habits might be threatened; local businesses might be decimated; local people might lose jobs which are farmed abroad and not have the skill sets to seek something better.

Politicians and business executives must recognize this complex fact of life. They shouldn’t adopt simplistic “let the global marketplace prevail, even if it’s painful” (for others, of course) or simplistic “let’s ‘protect’ our businesses and workers from foreign competition”. Neither black-white alternative will work in the long haul.

Globalization is a good thing. It spurs efficiency. It spurs healthy competition. It spurs agility. It offers avenues for new customers, sales, licenses, distribution channels, partnerships, and such. I always advise my clients to develop their corporate strategies with these premises in mind.

Yet for many individuals, and countries, the tough times may precede the good times. I think Ralph Peters’ words are prescient. Which means that leaders in both the private and public sector should start collaborating on ways to constructively smooth the edges and buffer some of the pain of unfettered globalization—without killing the free market goose that lays the golden eggs. It’s a conundrum: On one hand, smothering free markets with good protectionist intentions will lower the prosperity bar for everyone. On the other hand, it’s hard to sustain economic growth and prosperity in any country when its social landscape is in upheaval.

A Bunch of One-Pagers

2006-09-14T17:13:00.000-07:00

"A Bunch of One-Pagers" by Oren Harari. September 14, 2006

I just spent a delightful day with Harold Gray, a Senior Vice President at State Farm Insurance. In my recently released book Break From the Pack, I describe how Gray led a turnaround in the Pacific Northwest region that was so dramatic that the CEO of State Farm, Ed Rust, proclaimed it one of the most exceptional outcomes he had ever seen at State Farm.

In my book I thought I did a pretty good job describing the strategic, operational, and leadership steps that Gray took, but he reminded me of something that I’d overlooked because it was so ridiculously simple. Yet that simple thing had profound consequences.

Like many large, mature companies, State Farm’s culture was bulging with lots of people preparing lots of long, complex reports and documents. These long complex reports and documents were continually copied, earnestly distributed, and often presented in long, complex meetings. The result? Slow communication, slower follow-up, and vanilla decision-making.

One of the many ways that Gray attacked this beast was to insist on ever-shorter and shorter documents. Ultimately, he led with a ridiculously simple commitment to “a bunch of one-pagers”, in his words. With some exceptions, all reports and documents that advocated action had to be one page long. He told me, “I actually said that ½ page would be better, but I’d accept one page.”

So any action plans about customer retention, employee morale, sales enhancement, agent relationship, and such became “a bunch of one pagers.” The impact? The ideas had to stand on their own merit. Less b.s., less grandstanding, less “padding”, less time and resources devoted to verbosity and explanation of ideas that were inherently ambiguous or suspect. More “KISS” (keep it simple, stupid), more urgency, and more clean, crisp, communication of ideas and decisions.

All this led to more clarity, more consensus, more speed, and more accountability—and shorter meetings! These attributes were essential in carrying out Gray’s very specific blueprint for transformational change and enhanced performance.

So if you want to turn your corporate culture into something more agile and productive, start demanding a bunch of one-pagers.

Why Collaboration Matters

2006-09-06T12:30:00.000-07:00

XIP (short for Xerox International Partners)--based in Palo Alto, California--is a sales, marketing, and distribution arm of Fuji Xerox. The organization offers printers, full-system copiers and other document imaging systems for resale under other companies' brand names.

XIP operates in a tough, highly competitive global environment (come to think of it, these days, who doesn’t?) One would think that to survive in this Mad Max market, the boss would be a kick-ass, take-no prisoner type. I have no doubt that CEO Sunil Gupta is a tough guy, but what really intrigues me is his (correct) assessment that in today’s marketplace, it’s in-house collaboration—not command-and-control, not intimidation, not turfism, not pure Darwinian survival of the fittest--that will create corporate winners.

In a recent phone conversation, Gupta told me that one of his main priorities is to get three internal constituencies to work more closely and more transparently with one another. He cited his own management and technical team as one group, the folks at Fuji Xerox-- who are XIP’s exclusive supplier of technology as another group, and the members of XIP’s Board of Directors as the third group. Gupta’s belief is that pooling the talent and resources of these three stakeholders will create a faster, more cost-efficient and more innovative XIP. He doesn’t expect, or want, these three groups to second-guess or micro-manage each other’s affairs. He wants them to contribute their brains and passions towards common goals, without regard to artificial organizational barriers.

Gupta’s goal is absolutely valid. Today’s global marketplace is unbelievably fast, fluid, and transparent. In that environment, it’s the most agile and “smart” organizations which will prosper. And to become agile and smart, organizations must encourage—indeed, demand—that genuine collaboration become real, and not just lip service. Several years ago, Bob Ulrich, CEO of retailer Target, told me that one of the main reasons that the Target corporation stayed so innovative and vibrant is because he was unequivocal about pushing “boundarilessness” throughout the organization, so that divisions and units and departments and management levels freely shared information with one another, and freely allowed migration of people and data among themselves. Companies as diverse as Target, GE, 3M, Gore Associates, Genentech, Google, and Public Financial Management have strong cultures marked by performance accountability, to be sure, but also by collaboration, openness and transparency.

It’s not easy to break down beliefs and cultures that revolve around status, rank, turf, secrecy, separateness, closed doors, and “for your eyes only”. But Sunil Gupta, Bob Ulrich, and other exceptional executives believe that it ought to be a top leadership priority to try.

Complacency, Arrogance, and Greed

2006-08-28T10:42:00.000-07:00

Rich Teerlink, the former CEO of Harley Davidson, has pointed out that it’s not competitors that damage organizations, it’s “complacency, arrogance, or greed.” I think he’s right on target. First of all, competition is inevitable in today’s global free-markets. You can’t escape it. Yet even when it’s fierce, any forward-looking and well-led company can succeed. Just think about where you shop: There’s Wal-Mart, Costco, Target, Nordstrom, Zara, Saks, Victoria’s Secret, Dollar Stores, Bed Bath and Beyond, and on and on. Each with a different business model, many serving different market niches—all successful despite ruthless competition in their industry. Competition per se doesn’t kill organizations .

Like Teerlink, I think the real culprits are complacency, arrogance, and greed. Consider:

First, Complacency: the notion of “why fix it if it ain’t broke?” Buddy, it’s broke, or it’s in the process of breaking. Today’s good numbers ought to be celebrated, but remember they’re a scorecard of yesterday’s decisions. If your numbers are good today, that means you were both smart enough and lucky enough to have made some good decisions yesterday. But assuming “why fix it?” under these conditions is akin to assuming that tomorrow’s conditions will be the same as yesterday’s. They won’t even be the same as today’s.

Next, Arrogance: the smug notion that hey, we’re big and we’re powerful, ergo we’re invincible. No such luck. Nobody is safe today, regardless of one’s size and press clippings. In today’s marketplace, it’s intangibles like speed, innovation, responsiveness, and agility that make the difference. That's why countless large corporations have, like dinosaurs, become extinct over the past 20 years. (Of the list of 1980 Fortune 500 companies, more than 50% no longer exist; and many that do exist sometimes appear to be nearing life-support, witness GM, US Airways, and Kodak).

Arrogance locks companies and leaders into protecting their decaying products and technologies, subsidizing internal processes and systems that are becoming irrelevant or obsolete, and unwilling to show genuine humility to the forces of the marketplace that demand disruptive change.

Finally, Greed: the dysfunctional obsession with more, more, and more. When companies are greedy, they swallow up other organizations in a serial acquisition orgy primarily so the CEO can state that “his” (it’s usually a he) company is the biggest, or that his company can provide everything (beware the “one stop shopping” fantasy; customers don’t cooperate with that vision and it’s impossible for any vendor to do everything great). Greedy companies often become fat; their decisions often become dumb, ergo the “fat, dumb, happy” syndrome. Of course, greedy companies are run by greedy leaders. When leaders are greedy, their decisions are based mainly on what will make them look better, or personally wealthier. Decisions are based primarily on self-aggrandizement, not on what will make the company stronger and more vibrant in the future.

Competitors shouldn’t be ignored. They need to be monitored and tracked. They need to be fought, too. But as leaders, remember that, ultimately, it’s not competitors who will do us in. Complacency, arrogance or greed will.

Ruminations from Abroad

2006-08-24T10:42:00.000-07:00

My family and I just got back from a couple weeks’ holiday in London and Ireland. Here are a few random musings:

1. If you’ve never visited Ireland, go. It’s an absolutely lovely country filled with friendly, just plain nice folks. You’ll also be impressed with the huge impact that Ireland has had on the U.S.; some of the most common surnames and prominent American historical figures spring from Ireland.
2. Ireland is the fastest growing economy in the European Union. Here’s why: It lowered taxes, thus spurring foreign investment and home-grown entrepreurship. It embraced globalization, freely employing talent, technology and partnerships from other European members and from other sectors of the planet. It upped the investment in education, and now the ratio of highly educated young people to retiring pensioners is a healthy one. Maybe there are some clues here for nations and for individual companies.
3. London is, as always, a fabulous city to visit. Unfortunately, after a lovely visit, my family happened to be in Heathrow airport one day after the dramatic terrorist arrests. Not a place you want to be. Controlled but mass chaos. When we flew to Dublin from London that day, the only things we could take on board were our travel documents, wallets and prescribed medicines. Everything else had to be checked in. A couple weeks later, we flew back home via Frankfurt Germany. Less draconian than Heathrow, but still, long queues, no liquids, no gels-- and a handsearch through every carryon item and a thorough screening/frisking of each passenger’s body.

So here’s my politically incorrect thought as I saw my 9 year old son and my 80 year old mother go through this lengthy process. Statistically, the overwhelming majority of Muslims aren’t terrorists, but thus far, 100% of the terrorists or would-be terrorists have been young Muslim men. Doesn’t disciplined scientific profiling-- as simply one proactive police tool in a surveillance toolbox-- become a reasonable, sane response to these data? Conversely, are we all prepared to endure steadily increasing hardship and anxieties at airports, and a resultant weakening of industries and economies, because we don’t want to confront hard data, because we don’t want to offend anyone? And by the way, good police work is a must (kudos to Scotland Yard), but each time we add another “no-no” to our list of terrorist possibilities (box cutters, shoe heels, liquids, etc.), we’re reacting to a prior event while the bad guys move on to the next big thing. If we continue with the irrational premise that everyone in an airport is equally likely to cause mass destruction, then, logically, we’ll eventually reach the point that the only people who’ll fly are one of two types: those who have multiple hours to enjoy in airport queues, or, those who bring no luggage and are willing to sit in a plane in their underwear. Neither scenario is particularly attractive.

Doing Well by Doing Good

2006-08-16T10:41:00.000-07:00

Yes, indeed, it is possible to do financially well by doing something virtuous and good—and truly innovative. My former research assistant Kyra Peyton (who recently graduated MBA with honors) brought this combination aw-shucks/entrepreneurial genius story to my attention.

Are you familiar with GrameenPhone? After you read this piece, I know you’re going to want to google it. GrameenPhone is Bangladesh’s leading provider of GSM cellular services. It is owned 38%-62% by the country’s Grameen Telecom and by Norway’s Telenor AS. The company provides affordable telecommunications to millions of Bangladeshis at the lower base of the economic pyramid, enabling them to lift themselves out of abject $2-a-day poverty by starting self-sustaining micro-businesses as village phone operators.

Yes, you read that right. Through its innovative “Village Phones” program, GrameenPhone partners with GrameenBank to generate micro-loans and cell phones as tools to combat poverty. Here’s how it works:

Before GrameenPhone, many Bangladeshis had extremely limited access to capital and telecom services, and no skills or means to live beyond subsistence farming. Now, some of the country’s poorest citizens are able to secure a micro-loan from GrameenBank, use the capital to start a small business as a village phone operator with a Grameen cell phone, and earn a living wage—while opening up telecommunications to people (also through Grameen bank loans) who never imagined they’d have the opportunity.

Are you aware that 75% of the world’s population earns less than $2,000 annually? That’s 4.5 billion people. Are you aware that nearly that same number do not have direct immediate access to a telephone? GrameenPhone recognized a huge opportunity in this vast untapped segment. Unlike most businesses that succumb to the lure of the up-market (which is usually swamped with competitors), GrameenPhone moved down-market and now dominates a hitherto incumbent-free market that it created.

Again, this is not just a feel-good story. Grameen is not a charity. In 2004, net earnings increased 59% and the company has more than doubled its total number of subscribers to nearly 2.5 million, while providing telecom access to a market space representing 60 million people in rural Bangladesh . It turns out that seemingly destitute people want the service, they’re willing to find a way to pay for it, and lo and behold, they pay their bills and repay their loans. GrameenPhone’s strategy has caught the attention of Nokia. In November 2005, Nokia and GrameenPhone announced a partnership to launch the Village Phones program in Uganda and Rwanda.

Bless them. Tragically, global poverty is a huge market niche. But I’m glad to see that some companies are doing their shareholders well by doing their painfully poor customers some good.

If You’re Serious About Change, Maybe You Oughta Move

2006-08-09T10:40:00.000-07:00

"If You’re Serious About Change, Maybe You Oughta Move" by Oren Harari. August 9, 2006

Here’s a little note about “change”. Are you ready for something that goes beyond lip service and micro-incremental adjustments to your current processes and culture? Well, here it is: If you’re leading a company that’s in dire need for serious, big-time change, then consider moving headquarters to another state.

That’s what Carlos Ghosn is doing to shake up Nissan U.S.A. He shut down the company’s U.S. headquarters in Los Angeles and moved it to Nashville. The two immediate payoffs are pretty obvious: lower costs on one hand, and closer proximity to the local Nissan factories on the other hand

But as Holman Jenkins of the Wall St. Journal points out in his July 5 column, the really big payoff of Ghosn’s move is that “it blew up a status quo that was showing signs of staleness.” Jenkins goes further and suggests that leaders the of wounded GM could learn something from Ghosn. Here’s what he says:

“GM moving itself from Detroit would be unthinkable, and that’s the problem. History, tradition, the importance to the local economy, and deep roots, blah, blah. Against that, it’s hard to put your finger on any quantifiable gain from moving the company’s HQ from Detroit, except that it would change everything. Thousands of managers would refuse to go. Entire departments and a corporate hierarchy would have to be reconstituted. Old office plans and job charts would be trashed. New ones would be designed from scratch.”

Would moving GM’s headquarters be the elixir that would solve the company’s colossal challenges? On its own, of course not. But I think it would put real teeth into the notion of “change”. It would inject urgency and speed into the “change process.” It would open the doors for transformations in how the business is conducted. It would open the doors for new blood, new thinking, new kinds of managers and employees. With a company as calcified as GM, it might be the move that actually breaks through the inert corporate cholesterol that is now strangling the organization despite (or perhaps, because of) the careful, cautious good intentions of its leaders.

As Jenkins points out, “most of us, in this sense, are too conservative for our own good…Radical steps are sometimes indicated in corporate pathology.”

There are many radical steps that we as leaders fail to pursue because we think they’re too painful or risky. The reality is that not pursuing them will often lead to even more pain and risk.

The Real Rationale for a (Ridiculous) Ford-GM Merger?

2006-08-01T11:23:00.000-07:00

In my last blog (July 25), I described the stupidity of the trial-balloon idea being floated by so-called "brilliant thinkers": mainly, that GM can overcome its catastrophic problems by merging with a sick Ford. Read that blog; it’ll start the process of curing you of the idea that mega-mergers are the answers to life’s persistent problems.

One reader’s response to my blog was so insightful that I wanted to post it here, because it’s something that I’d overlooked. Here’s what he wrote me:

“The purpose of the Ford-GM merger would allow the C-Suite (my note: that’s the executive suite) to stay employed for a few years longer. It’s the job security of bringing additional chaos with the smokescreen of fixing the company. By upselling the 'potential' benefits to shareholders and analysts they can shift focus from the actual problems. A lot of minor inefficiencies can be spotted and fixed post merger to make the executives look like heroes; they make for a lot of bullet points on the annual report. This type of solution is the most likely for executives unwilling or unable to effect positive growth and true efficiencies.”

Well said! As I wrote back to this discerning reader, the ultimate tragedy of this approach towards “fixing” things is that once the executives look like heroes, they’ll exit the stage and retire with millions, leaving the inevitable huge mess for someone else to inherit.

In my upcoming book Break From the Pack, chapter 2 is called “How to Lose: Ten Compulsions Guaranteed to Keep You Mired in the Pack”. In the spirit of my reader’s comments above, let me draw a few sentences from “Compulsion #10: The Compulsion to Do Anything as Long as You’re Doing Something”:

(Many leaders respond to big, pressing problems) with manic bursts of action—any action, regardless of whether it’s coherent, purposeful, disciplined, or inspiring…..Such actions can be acquisitions, divestitures, “back-to-basics” initiatives, restructuring, downsizing, or fresh ad campaigns. It doesn’t matter whether there is any strategic logic, due diligence, or deep execution, as long as “actions” happen….Short term spikes in performance sometimes occur, but they’re not sustainable. Eventually, the chaos catches up.

Acquisitions can sometimes be of great value in building a firm’s competitive strength, but not when leaders initiate them primarily out of myopia, desperation or self-aggrandizement.

Dumb and Dumber (Part 2, the Dumber Part)

2006-07-25T10:35:00.000-07:00

In last week’s blog (July 20), I observed that executives’ quest for the "magic bullet quick fix" often leads them to consider courses of action that are just plain dumb. As an example, last week I discussed the dumb-ness of the prevailing idea that GM’s horrific woes can be fixed by a GM-Nissan-Renault joint venture headed by Carlos Ghosn.

Now I’ve got something even dumber for you. Some people are—I kid you not-- actually talking about a GM-Ford merger. What are these people smoking? Apart from the fact that 60-80% of mega-mergers destroy shareholder value, and apart from the fact that the precedent of the 1998 Daimler-Chrysler deal has halved the value of the combined firms, consider one stark reality. The mega-problems of GM that I outlined last week (legacy and operational costs, quality, design, labor, bureaucracy and such) are also endemic in Ford (though perhaps to a slightly smaller extent). How will a merger fix these problems-- rather than exacerbate them?

The proponents of the deal talk about potential (no guarantee) cost savings with a capitalized value that would exceed the two companies’ combined (and very low) market cap. But so what? Even if you could squeeze out those costs, what do you do about all the problems that made the companies sick in the first place? And where will the cool, high-margin cars come from? Where will the corporate agility and innovation come from? How exactly will you grow the company profitably?

Next month my new book Break From the Pack is launched, and one of the topics you might be interested in what I call “The Dinosaurs Mating Syndrome” which is one reason that so many big mergers fail. Let me quote from one paragraph in the book:

Perhaps the greatest delusion executives have about mergers is the belief that that somehow two bureaucratic, backward-looking corporations will join forces and spawn an impregnable giant. The underlying assumption is that two companies that have individually managed to generate flat earnings and declining share will be able to magically continue their debilitating but comfort-zone strategies by jumping into bed together and getting bigger. But as we’ve seen, companies that merge primarily to protect faltering product lines, obsolete business models and grossly inefficient infrastructures are doomed to failure in a Copycat Economy…… Ultimately, a merger might temporarily prop up any two beasts by providing them better scale and better marketing, but the end result is still extreme vulnerability, if not extinction.

A GM-Ford marriage? Only if you believe that two dinosaurs mating will somehow produce a cheetah. I predict that a GM-Ford hybrid will be a slower, more complex, more bureaucratic, more politicized offspring that would need to be put on life support within 5 years. We need bold initiatives and bolder leaders to fix GM, but asking the company to mate with Ford is surely a “dumber” idea.

Dumb and Dumber (Part 1, the Dumb Part)

2006-07-20T11:41:00.000-07:00

I never cease to be amazed at executives’ perpetual search for quick fixes to complex problems. These searches are not merely fruitless and counterproductive, they’re often just plain dumb. Case in point: What to do about a hemorrhaging General Motors.

The dumb quick fix idea that seems to have so many people salivating is a GM-Renault-Nissan “joint venture” headed by Carlos Ghosn. I thought the days of the celebrity superhero CEO were over. Yes, Ghosn has done a fabulous job with Nissan, and amazingly, he’s now also doing a good job with Renault, even though he’s running both companies while jetting back and forth between 12 time zones.

But while Ghosn may be bionic, he’s not superman. No one person can run three enormous global firms scattered around the world. Yeah, yeah, I know the arguments: cost savings for GM, broader access to China and U.S. for Renault and Nissan, a new personal challenge for Ghosn, etc. etc.

On paper, it looks great. But apart from the massive difficulties in integrating three huge companies with vastly different corporate personas, there’s an even bigger problem. GM’s challenges are colossal: runaway legacy costs (health care, pensions, and such), antiquated labor-management relations, hideously inefficient operations, sclerotic bureaucracy, irregular product quality, and yawner design. Small wonder the company lost $10.6 billion last year and had to sell 51% controlling stake in its profitable GMAC finance arm in order to raise some cash.

To get fixed, GM needs a courageous, disciplined, and visionary CEO (that’s Ghosn) who’s undistracted, totally focused, and fully committed solely to GM’s problems and GM's future (that’s not Ghosn).

Current CEO Rick Wagoner has done a lousy job. The board ought to dump him. If Ghosn quit his positions at Renault and Nissan and took over the helm at GM and GM alone, I’d buy it. So would the investment community. Otherwise, the trifecta idea is another fruitless search for a quickie fix, and it’s just plain dumb. Next week, I’ll discuss an even dumber plan to fix GM.

Help Your BEST Players Get On Board

2006-07-11T11:40:00.000-07:00

Occasionally, an executive who is trying a bold, new tack on the business will tell me how difficult it is “to get people on board”. I agree. Many people love to talk about innovation and change, but they are often remarkably resistant to those leaders who try to actually breathe life into those concepts.

Having said that, let me flip the equation around. There may always be career skeptics, but I think the bigger problem that leaders and organizations face is that they do not make it worthwhile and attractive for those employees and managers who really do want to get “on board”.

Remember that in any company, the best players at any level or function—the smartest, the most talented, the most proactive, the most impatient, the most imaginative-- are perpetually hungry for innovative action. They’re eager to challenge “the way we’ve always done things”. They want to plunge through the walls of conventional wisdom to make a positive impact, and they want to reap the financial and advancement rewards for doing so.

If they don’t have the power, the opportunities, and incentives to do that, they’re no dumber than the rest of us. As rational people, they’ll pour cold water on their own initiative. They’ll learn to conform to the same old game, and the organization will suffer accordingly. Or, even worse, they’ll start polishing their resume and be gone, seeking a new climate for challenge and responsibility elsewhere. They’ll do it sooner or later, for the simple reason that they’re marketable. And then the company really gets mired in decline, because when the best and brightest leave, the mediocre players and the drones will always stay on. They’ll stick to a company like barnacles, because they know they’re not particularly marketable, or because they retired years ago and never told anybody.

As I’ve said in the past, one of the best predictors of organizational success or decline is who’s happy and who’s upset. If leaders set up an environment where the best players are the most dissatisfied and the drones the most comfortable, you can predict a bad moon rising regardless of the company’s current size and prestige.

The moral for the leader? Stack the deck by seeking and nurturing those people in your organization who are right now straining at the leash for the opportunity to make a true difference and be accountable for it. They exist. They’ll be your critical mass for exciting change. They’ll also inspire some of the skeptics, and help drive many of the remainder to seek less challenging environments in other companies. That’s what you want, isn’t it? And, by the way, it’s a lot easier, and more fun, to follow my advice than to try to verbally convince everybody to “get on board.”

Innovation Anywhere, Even in a Public Restroom

2006-07-06T11:32:00.000-07:00

Do not tell me that you have to be in the high-tech or fashion world to be a world-class innovator. In my upcoming book, I describe how Minneapolis-based Anchor Wall Systems has reinvented retaining walls with innovations in design (over 700 different shapes and colors), customization (easy Lego-like assembly), and technology (new, clean pin-less and mortar-less processes). The upshot? Over 50% market share with premium pricing and very loyal institutional and individual customers. They’re loyal because they’re delighted with what AWS provides them.

A couple weeks ago I was at an Amtrak station in Connecticut waiting to take a train to Providence, Rhode Island. During my wait, I got delighted with a reinvention of another mundane product. Picture this familiar scene. You go to a public toilet. You wash your hands. You use a dinky little hand dryer which emits a dinky little blast of air and takes forever to dry your hands. Usually I wind up sticking my hands underneath for a while, then wiping them on my pants, or else just saying the hell with it and pulling down the paper towels.

But there, in the little Amtrak station outside Greenwich, I found salvation: The XLerator from Massachusetts-based Excel Dryer. It’s big, at least triple the size of a standard hand dryer. The heat it blasts is not only huge and effective (dries your hands fast) but actually feels darn pleasurable. I loved it. And, as I learned when I researched the company, it not only fully dries your hands within 15 seconds (three times faster than ordinary dryers), it also uses 80% less energy than the little dryers and 95% less energy than paper towels. Now that’s innovation! And Excel is doing it with hair dryers as well.

One innovation won’t cut it, either for Anchor Wall Systems or for Excel Dryer. Sustainable competitive advantage is about creating a culture of constant innovation that yields a steady pipeline of fresh, compelling products that excite customers. That’s precisely what these companies seem to be committed to. Good for them. But I like them for another reason: they demonstrate once again—just like Progressive has successfully done with insurance and UPS has successfully done with supply chain management—that innovation can, and should, take place in any industry, however mundane, anywhere.

Good Marketing + Bad Quality =Lousy Combination

2006-06-29T06:14:00.000-07:00

Last week I described my frustration with American cars that I’ve owned, especially when compared to the Japanese cars that have also been part of our family’s auto stable over the past decade. Basically, I noted that nothing ever went wrong with the latter, and something frequently went wrong with the former.

I thought about this as I went with a buddy to the NASCAR Save Mart 350 Race last week. All the big boys were there: Tony Stewart, Earnhardt Jr., Greg Biffle, Jimmie Johnson, the Busch brothers, the ultimate winner Jeff Gordon, and the like. Here’s what I thought:

NASCAR is the fastest growing sport in the U.S. Its fans are legendary in their fanatic loyalty. The data show that the brands whose logos are plastered on the cars--products like Post-It, Viagra, Cheerios, and Tide, and organizations like Home Depot, FedEx, Harrah’s, and Jack Daniel’s—gain substantial exposure, customer interest and uptick in sales from their investment. NASCAR fans clearly respond to the marketing.

With one exception: The ripple impact of NASCAR doesn’t extend to the very cars that are doing the racing. Every single car in the race is a Dodge, Chevy, or Ford. Yet all three companies are in serious financial trouble and steadily losing market share to foreign competitors. (Technically, Dodge is a “foreign” competitor since it’s now part of Daimler, but it’s still basically an American-produced product).

How weird! Think about it. NASCAR exposure seems to effectively generate a great Return On Investment for every product except the cars themselves. It used to be simple in Detroit: “Win on Sunday, sell on Monday.” That’s clearly not the case any more.

Moral of story: Good marketing will definitely help a high-quality product and a high-performing organization, the kinds whose logos cover the racing cars. But even the best marketing won’t prop up a product or company that doesn’t have those qualities, at least not on any sustained basis. Putting lipstick on the pig doesn’t change its fundamental attributes. If the product or organization isn’t state of the art, you’re ultimately throwing away marketing dollars.

Oh, one more thing. I understand that next year Toyota will sponsor a car in the NASCAR races, thus ending the Americans' marketing monopoly. If I was Detroit, I’d be worried.

Grrrrr, Another Little Quality Problem

2006-06-20T11:08:00.000-07:00

To those of you who regularly read my weekly blog, I apologize for not posting one last week. My family and I took a micro-vacation. Everything went well, with one exception. My car developed a front-headlight problem.

I’ll tell you why that ticked me off so much. We own three cars: two Toyotas and an American auto. We bought each one of them brand new in 2001 and 2002. Here’s my quiz question to you: One of those cars has a mechanical problem every six to eight weeks. Guess which one it is.

The problems are never enormous breakdowns. They’re the small, niggling ones, but nevertheless significant and irritating. Like a driver’s seatbelt that is stuck, a right-direction blinker that’s on the fritz, or a passenger airbag that (according to the ever-friendly dashboard computer) needs to be checked. And let’s not forget the inevitable once-every-four month recall notice for some arcane something-or-other in the underbelly.

The people at the dealership are very nice, but just working the logistics to get the vehicle to them and then pick it up is a royal pain in the neck. My wife keeps telling me to dump my car and replace it with a Toyota. Maybe she’s right. Over the past decade we’ve owned a string of Toyotas and two American cars. Never a problem with the former, constant little ones with the latter.

I’m fed up, not only because of the hassles, but because I’m a rooter for Detroit to get its act together. Yes, I know that Ford and GM are saddled with enormous legacy costs that put them at a severe financial disadvantage when compared to Japanese vehicles. But none of that matters if they can’t make cars that work.

I’ll tell you why this discussion is so important. In every business nowadays, zero defects is simply the price of admission. Customers assume that the products they buy will run right until they’re finally ready to be discarded or replaced. Period. End of story.

But there’s more. Zero defects only allows the vendor to play in the game. To survive. But not to thrive. The bar has been raised. Competitive advantage in the car industry is about zero defects for starters—and also about design, fits, finishes, new technologies (like hybrid), customization, after-sale service, and such.

But forget the design and service and all. How can Detroit hope to compete (other than constantly lowering prices and thus killing any hope for sustainable margins and profitable growth) if I, a customer, can’t even count on the car to run error-free for more than six weeks at a time? If you’ve got an answer to that question, please let me know. Maybe I’ll figure it out as I dutifully head to the dealership tomorrow.

Turn Your Organization Into a Virtual Community

2006-06-08T10:52:00.000-07:00

It was a beautiful afternoon in the San Francisco Bay Area a couple weeks ago and the St. Louis Cardinals were in town for a series with the Giants. On the spur of the moment, I decided to go to the game that evening with my son—but I wanted to find two excellent seats near third base at a fair (that is, close to face value) price right away.

Not long ago, my desire would have been delusional. But thanks to craigslist (www.craigslist.org), I was easily able to locate a season ticket holder who wanted to unload two third base seats at face value at the last moment. Best of all, I chose someone who lived ten miles from me. We agreed to meet at a parking lot off the freeway. I gave this complete stranger $70 in cash, he gave me two prized tickets, and my son and I headed to AT&T Park to see Albert Pujols and Barry Bonds.

My point is not to bore you with baseball stories, but to suggest that an extraordinary new phenomenon is rapidly emerging. Sites like craigslist, MySpace, Flickr, YouTube, and TagWorld are innovative avenues that allow people to find others, to connect with others, to learn about others, to learn from others, to enjoy each other, and to share data and photos and dreams and experiences with others. MySpace alone boasts an incredible 72 million members around the world who selectively interact with each other in a transparent, boundariless and real-time environment .

Why is this important? Because nowadays, companies that want to succeed will have to create that sort of environment for their own employees. And most of them don’t. While the technology exists that lets me quickly locate someone for a mutually beneficial exchange of baseball tickets, employees in most organizations regularly bump into rigid boundaries and opaque cultures that keep them separate from information and from each other. How easily and quickly can a given employee access whatever unfiltered, unedited financial or customer data that he needs? How easily and quickly can she locate the exact person within the organization who has the exact “match” of expertise and interests that she needs. And do these employees find it exciting, and fun, to do this?

Think about it. All this stuff happens every day at MySpace and craigslist and eBay. Now consider your own organization. How easy and fun is it for Employee A to post data, opinions, feedback, analysis, updates, questions, interests, passions and expertise on an internal corporate website—and how easy and fun is it for Employee B who might want that “stuff” to easily sift through the virtual, cataloged organizational community and find, then connect, with Employee A, regardless of Employee A’s rank, function, or location?

Of course, you don't want to create a work environment where employees are mindlessly surfing the web all day just "for fun". But consider the possibilities of an attractive, well-lubed, transparent, fully functional, utilitarian web-based platform that allows people to find whoever and whatever they need to get things done in a newer, better way. Let me repharase that: If you want to predict tomorrow’s winners, bet on those organizations that can provide both the technology and the culture to generate a friction-free virtual community—a community that allows people to quickly pool talent and knowledge for innovative problem-solving and commercial breakthroughs. And one more thing: imagine extending that community to customers. Talk about turbo-charging R&D, customer loyalty, and brand equity!

The trend for virtual community is already happening, but is it happening in your organization?

Final (Thank Goodness) Thoughts on Lay and Skilling

2006-06-01T09:01:00.000-07:00

So Ken Lay and Jeff Skilling are now officially guilty of the lies and deceptions that cost investors and employees billions of dollars—and which damaged the integrity of the capital markets that are so essential to the health of our free market economy. It’s encouraging that the legal system does work even when the defendants spent $60 million on high priced attorneys whose job was to dress up scoundrels in a way as to make them indistinguishable from the folks who lost their entire retirement portfolios.

Here’s what always rankled me the most about their defense. When Enron was flying high in the late ‘90’s, Lay and Skilling were more than willing to take full responsibility and ownership for the company’s glowing status. (And they were certainly more than willing to enjoy the public perks, privileges and compensation of their positions). Can you imagine either Lay or Skilling stating in, say, 1999: “Gosh, I can’t explain our success. I don’t really know what’s going on. I’m sure it’s all due to people throughout the company doing things that I have nothing to do with, and often don’t even understand. In fact, I don’t have that much to do with what’s going on.”

But after the company’s crash and burn, that’s exactly what they said. How disingenuous. The reality is that leaders set the tone, initiate the primary courses of action, bless the initiatives, articulate the standards, and both promote and live the values that ultimately all define the persona and direction of the company. That’s precisely what Lay and Skilling did for years. And then they denied it when their company imploded.

My own research shows that high-integrity leaders step back and let team members share the glory and rewards. In fact, they lean towards attributing all successes to the people who report to them. On the other hand, high-integrity leaders don’t blame others when things go sour. They take public and personal ownership for setbacks and failures. They truly lead by the old adage that “the buck stops here”.

Lay and Skilling did the opposite. They played the roles of geniuses and Supermen during the good times, and the roles of finger-pointers and idiots (“I knew nothing”) during the bad times. I know that’s not a criminal offense, but it’s the leadership offense that bothered me the most.

Remember Jerry, George, Elaine and Kramer in the last episode of Seinfeld? They learned nothing from their trial, and reverted back to their usual “M.O.”s while sitting in their jail cell. I think that’s precisely what will happen with Lay and Skilling. In this case, it’s too bad life is not a sit-com.

"We've Got the Hamburgers"

2006-05-24T11:07:00.000-07:00

Last week I had dinner with a few executives of a multinational firm. One of them, a sales manager in the company’s Europe division, told us a great story.

Apparently, the service in some McDonald’s fast-food restaurants in one Eastern European country was so bad (surly, insensitive, rude) that American managers were called in to try to explain the value of customer service to the local franchisees and vendors. Their response to the Americans’ message? “Why should we be nice to them (the customers)? We’ve got the hamburgers they want. They ought to be nice to us!”

Well, that got a good chuckle at my dinner party. But that also got me thinking. As you and I, real customers, endure regular phone hell, delays, incompetence, and unresponsiveness from “enlightened” American firms right here in the U.S., I wonder: Do these firms also believe that they’ve got the hamburgers and we poor slob customers should be grateful?

They’d never say so, of course. In fact, their mission statements and public relations pieces no doubt emphasize their commitment and love for the customer. Very nice. But that same American customer who’s supposedly loved regularly slogs through hurdles that those Eastern European managers would certainly understand, and appreciate.

I think every executive, particularly those ensconced in corporate headquarters, ought to spend regular phone time addressing incoming customer complaints and queries. They ought to spend time on the front lines interacting with customers. They ought to regularly pretend to be an anonymous customer: Call the 800 number for help. Try to get some timely information via phone or mail. Go to a facility that customers frequent, and go with a “problem” that needs attention. You get the idea.

If more executives did that, all the “customer caring” that is espoused in training and marketing materials might become more of a reality, and the “we’ve got the hamburgers” effect might become a tale of the past.

Ayn Rand on Boards of Directors

2006-05-16T09:06:00.000-07:00

Ayn Rand has written some fascinating books—Atlas Shrugged and The Fountainhead are two of my favorites. I was recently leafing through an old copy of The Fountainhead and came across a wonderful little passage on boards of directors. I had always thought that the roots of lousy corporate governance in so many companies lay with things like the sheer incompetence of many board members, or their conflict of interest with their compensation package or with the CEO who appointed them, or with their lack of spine and integrity. But Ayn Rand pointed me to another possible factor: a group dynamic that yields blandness and turgidity. As she points out, this group dynamic also explains the frequent ineffectualness of committees.

Let’s set the stage. We’re in the 1930’s, in New York City. Howard Roark, the young brilliant, iconoclastic architect is approached by a businessman named Kent Lansing. Lansing is a member of the board of directors of a corporation which is planning to erect a luxurious hotel in Manhattan. The board has not yet decided on an architect, but Lansing wants the commission to go to Roark.

Here’s the conversation that follows.

“I won’t try to tell you how much I’d like to do it,” Roark said to him at the end of their first interview. “But there’s not a chance of my getting it. I can get along with people—when they’re alone. I can do nothing with them in groups. No board has ever hired me—and I don’t think one ever will.”

Kent Lansing smiled. “Have you ever known a board to do anything?”

“What do you mean?”

“Just that: have you ever known a board to do anything at all?”

“Well, they seem to exist and function.”

“Do they? You know, there was a time when everyone thought it self-evident that the earth was flat. It would be entertaining to speculate upon the nature and causes of humanity’s illusions. I’ll write a book about it some day. It won’t be popular. I’ll have a chapter on boards of directors. You see, they don’t exist.”

“I’d like to believe you, but what’s the gag?”

“…All I mean is that a board of directors is one or two ambitious men—and a lot of ballast. I mean that groups of men are vacuums. Great big empty nothings. They say we can’t visualize a total nothing. Hell, sit at any committee meeting. The point is only who chooses to fill that nothing. It’s a tough battle. The toughest. It’s simple enough to fight any enemy, so long as he’s there to be fought. But when he isn’t……”

Postscript: Speaking of those tough battles, I am reminded of Peter Drucker’s conclusion that the only times he had seen something important come out of organizations is when that something had been carried out by “monomaniacs with a mission.”

Post-postscript: Kent Lansing fought the battle against the ennui, inconclusiveness and petty personal politics of his fellow board members, reassuring Roark with “Don’t worry. They’re all against me. But I have one advantage: they don’t know what they want. I do.” And two months later, Roark signed a contract to design the hotel.

Four Barriers to Your Next Growth Spurt

2006-05-10T09:05:00.000-07:00

I was recently working with a client company which is getting ready for its next big growth spurt. Everything’s in place: cool new product, good people, a clear strategic plan, and a solid financial structure. We should all have such problems!

But there are always problems, aren’t there? In fact, the senior managers and I came up with four potential pitfalls to their growth spurt, even if everything else seems to be peachy keen. Seems to me that any company ought to seriously consider these potential pitfalls, so here they are:

1. Pitfall: Leaders and employees pay more attention to “the organization” than “the business.” In other words, they focus primarily on internal issues (processes, job descriptions, turf, politics) and wind up spending less time on external issues like customers, new technologies, competitors, market trends, and fleeting opportunities.
Solution: Pay attention to the internal stuff, but concentrate on external issues that lead to sustained growth.

2. Pitfall: Strategy becomes equivalent to meeting targets. Targets are the goals, the basis of the final scorecard. They say nothing about the kinds of decisions and behaviors that leaders must do to get there. When the ends are clear but the means are “anything goes” or “the ends justify the means”, then there’s an open invitation to confusion, inefficiencies and corruption.
Solution: Develop a coherent strategy and values set that clearly define the broad parameters of what the firm will do, and how, to reach those targets.

3. Pitfall: Strategy becomes “even more” of the same. It’s seductive to assume that growth and competitive success will occur if people do more/better of what they’ve always done, or what they’re familiar with. Given the perpetual dislocations in the external marketplace, this assumption is usually wrong.
Solution: Continually challenge sacred cows, innovate and collaborate to help the organization break new ground, become unique, and perpetually evolve in a way that truly matters to the customer.

4. Pitfall: Execution is a low-integrity, high-lip service affair. When the leaders don’t personally get involved in execution, when the talk isn’t walked by everyone, the execution—and hence the strategy itself—becomes flabby, unclear, inconsistent, inefficient, and idiosyncratic rather than institutional.
Solution: Make execution a real priority for everyone: insist on discipline, transparency, and accountability across the board.

Some Practical Questions About Immigration

2006-05-04T09:20:00.000-07:00

First, let’s establish my “street cred”. I am an immigrant. I came to the U.S. from Mexico when I was 6 years old because my father and mother found jobs here. I started first grade without knowing a word of English. To this day, going to Latin America is one of my favorite professional and personal pastimes. I’m pushing my kids to learn
Spanish, because I think everyone that lives in the U.S. would be wise to do so.

Having said that, I can also confess that I’m troubled by the recent “pro-immigration” demonstrations and boycotts, and the open-the-borders mentality among libertarians like those who write the Wall St. Journal op-ed page. Certainly I understand the rationales for the fears, frustrations and hopes that many undocumented immigrants harbor. And as a proponent of free-markets, I sympathize with the economic theories supporting the unfettered, boundariless global movement of labor.

And yet, I’m disturbed because I haven’t received adequate answers to a few practical questions. Like:

• Is a person’s willingness to sneak across a border and work hard sufficient grounds for enjoying permanent status in the U.S. ? I’ve traveled extensively throughout the world and wherever I go, I see people who desperately want to emigrate here. I’ll bet that, conservatively speaking, among the 6.5 billion or so people who live on earth, that at least 500 million of them would love to come to the U.S. and would be willing to work very hard for low wages upon entry. Should we open the borders and let half a billion people in? Hello??!?

• I can certainly empathize with businesses’ desires for cheap labor. But to paraphrase Thomas Sowell of the Hoover Institution, aren’t we simply subsidizing many businesses that would otherwise raise wages, or innovatively automate tasks, or offshore tasks, or get out of businesses that no longer make economic sense? A steady run of cheap labor—no questions asked—may be expedient for an individual firm in the short run, but consider this: in the long run, how efficient or innovative are domestic markets that are artificially propped up?

• The empirical data are pretty clear. It’s one thing to open the door to millions of new immigrants who have high-end professional skills. It’s quite another to open the door to millions of new immigrants who have, at very best, a high school education. The first scenario is a turbo-boost to competitive success in the global knowledge economy (and if anything, we need to make it even easier for folks like these to enter). The second scenario is a temporary salve for many vendors and consumers, and, I would suggest, a potentially adverse source of unintended social, political, and economic consequences nationwide.

• The first three bullets are open to debate, but this last one I hope is not. It’s the most important one. The bedrock of any effective democracy and market system is a rule of law. When laws are flagrantly skirted, and when those who skirt them insist that the laws are meaningless, and when people, in effect, get to choose which laws are “worthy” of being obeyed, I worry about the future of this country. Please spare me the flowery words about “we’re all immigrants.” Once and for all, the issue here is not immigration, but legal vs. illegal immigration. Like many recent immigrants and like your descendants, my family came here legally. What do we tell those people who are going through the laborious process of getting a visa, a green card, or—if they’re already here legally—their citizenship papers? Do we tell them they’re fools? What sort of message are we giving people in other countries who are planning to go through legal channels to be part of this country? What message do we send about U.S. law in general? I’m sorry, this issue can’t be prettied up or shoved under a rug, regardless of whether jobs presumably exist for people who are willing, however nobly, to risk even death to circumvent police and borders to get at them.

I’m no saint. Over the years, I know I’ve hired laborers who’ve turned out to be illegal, and because I speak Spanish, I’ve become friendly with some of them. I’m no genius, either. I don’t have the policy answers for this thorny issue. The idea of rounding up 12 million illegals and shipping them south is absolutely absurd. But the idea of rewarding lawbreaking with blanket amnesty is equally absurd, as is the accusation that controlling our border is somehow either racist or totalitarian. We need to have an honest dialogue on these matters, including those four bullets above, in order to come up with a just, viable, and enforceable immigration policy . Unfortunately, I’ve not been overly impressed with many of our legislators, who are either too spineless to confront the above four issues squarely, or so unprincipled that they are willing to pander to any group in order to get re-elected. My last thought: Vote them out. This immigration issue is way too important to tolerate cowardice or opportunism.

The 6 C’s of Leadership

2006-04-27T09:33:00.000-07:00

I just came back from Mike Milken’s Global Conference in Los Angeles, where I participated in a panel discussion of how small to medium sized businesses can capitalize on the opportunities of globalization. Great conference, though I confess it’s daunting to be in a hotel surrounded by Nobel laureates.

But I digress. No matter what subject was discussed during the three days—national security, global warming, health care, corporate competitive advantage, etc.—the subject of leadership was never far behind. Unsurprisingly, the need for leadership today is more important than ever before. Rafael Pastor, the ex-President of USA Networks and current CEO of Vistage International, and Barry Sternlicht, the ex-CEO of Starwood Hotels and current head of Starwood Capital Group, both had some astute comments on the subject. Coincidentally, and surprisingly, both of them summarized their perspectives with concepts beginning with a “C”, so it’s really easy to combine their viewpoints and come up with a "C" list of leadership attributes necessary for success in the 21st century. I wish I had enough poetry to come up with this list, but at least I can use my own words in describing the six elements:

1. Courage: Great leaders take risks. They are willing, even excited, about entering unchartered waters. They face their own fears, their own demons, the doubts of naysayers around them, the very real structural and financial hurdles before them—and they go forth anyway. That takes planning and discipline, to be sure, but most of all it takes courage.

2. Creativity: Great leaders embrace imagination. They foster innovation. If they themselves don’t possess those attributes, they surround themselves with people who do. They exude impatient with the status quo. They understand that doing the same-old, same-old is a recipe for decline. Their message to the troops is-- challenge conventional wisdom and break new ground. Do it with economic logic and operational discipline, yes, but do it with creativity.

3 and 4. Compassion and Caring. Sternlicht used these words in one phrase. For great leadership, he emphasized the importance of caring deeply about what you’re doing, about the welfare of your people and customers, and about doing things with a strong moral fiber. What that tells me is that analytically detached, amoral executives need not apply. Great leaders have emotional and ethical as well as intellectual integrity. They love, and they love ethically.

5. Curiosity: Great leaders come to the party with a sense of wonder and awe. They restlessly and repeatedly ask questions like-- What’s out there? (let's check it out!) What’s behind there? What’s underneath there? What if? Why not? When can we try it? What will happen? What did happen? What did we learn? What’s our next step?

6. Consistency. Sternlicht noted that great companies “consistently surprise customers.” I believe the issue of consistency is essential for effective branding and sustained competitive success. Great leaders create an environment where C’s #1-5 aren’t a one-shot flash-in-the-pan deal, but so steady and ingrained that people inside and outside the organization can count on them. They can count on the leader, and the organization manifesting traits like courage, creativity, compassion, caring, and curiosity.

Six C’s. Easy to remember. Do you have the conviction and commitment (two more C’s?) to carry (sorry, I couldn’t resist) them out?

The Content or the Box?

2006-04-19T07:51:00.000-07:00

In the current issue of Vanity Fair, Michael Wolff writes an interesting profile of Apple CEO Steve Jobs. One of his passages is deeply insightful. Here’s what he says:

“When Jobs is thinking about media he is, unlike all of the M.B.A.’s in New York and second-act-reversal scriptwriters in L.A., thinking from a purer state—he’s thinking about Marshall McLuhan, patron saint of the Bay Area’s digital culture, and his holistic, even biological media world. It’s the technology, stupid. It’s the experience, stupid. It’s the box that gets us off and makes us what we are….To Jobs, with his 99-cent-song and $1.99-video downloads, content is the commodity. The machine is the precious, unique, coveted, valuable, holy vessel. The machine is the idea.”

For Jobs, like McLuhan, the medium is the message. Why is this fascinating? Because for years we’ve been hearing the media, telco, and cable conglomerates say the very opposite, that the medium is the commodity and the message, the content, the programming, is the value-add.

My conclusion is that either point of view can be right, or wrong. Does that sound Zen-like? Well, try this for size: In today’s marketplace, everything becomes a commodity, but nothing needs to be a commodity.

Here’s what I mean. Whether it’s the content or “the box”, it all becomes commoditized and imitated by competitors eventually—usually sooner rather than later. At the same time, any company can create genuine value and competitive advantage by innovating in a way that matters to customers, whether it’s in the content, or whether it’s in the box. Nickelodeon has applied delightful imagination to content, and pumps that content through the most mundane cable. Apple has applied delightful imagination to boxes like iMacs and iPods, and pumps low-cost, low-priced content from a myriad of sources through them.

The lesson? Whatever your product or service, whatever the space you choose to compete in—it’s all ultimately a low-margin commodity unless you’re able to surround it with sustained, disciplined, high-magnitude innovation. The content or the box? It’s either, or neither, or both.

Back to the Future Redux

2006-04-11T07:50:00.000-07:00

Back to the Future Redux" by Oren Harari April 11, 2006

Since I’m no dumber than your average person, whenever I find myself in Hawaii on a business trip, I try to squeeze a few extra fun days. So last week, while taking a solitary hike in a remote area in the Big Island—nobody else around, trail covered with brush--I started to fantasize about what would happen if I turned the corner, stepped into a time warp, and suddenly found myself facing a group of Englishmen who beached their sailing ships in Hawaii 200 years ago.

Presumably, we could converse with each other, but how would they react when I told them I was from the year 2006? They wouldn’t believe me until they started to examine me, I suppose. Now my fantasy mind went into overdrive. They’d look at my cross-trainer shoes and my designer day pack and I think they’d be impressed. They’d appreciate the significant advances in engineering and materials science, not to mention the fashion.

But at least they could relate to those products, because they too wore shoes and carried bundles on their backs. But what would happen if they asked me how I got to that remote point in the Island? I’d have to explain concepts like jets and automobiles (and rental cars!) that carried me from the mainland to the islands to the hiking path in just a few hours. And what would happen when they reached into my pack and pulled out a cellphone? In their day, communication was a hit-and-miss affair, a letter that would, maybe, reach England after a few months, and a reply that, maybe, would get back to the original writer in another few months. How could I possibly explain that in 2006 I could punch a few buttons on this little hand held and talk clearly with their family members across the ocean? How could I possibly describe wireless technologies, or the supportive digital, mobile and service infrastructures?

And then they’d pull out my iPod. Right. I’d have to explain the iTunes platform, and peer-to-peer file sharing. Now that would be interesting. I’d help one of them put in the ear pieces and crank up Lynyrd Skynyrd or ZZTop and just step back and see their reactions (and would they even consider it music?)

My point is that we’ve advanced so far in science, technology, engineering, and design over the past 200 years that even though my English friends and I would speak the same language, we could no longer communicate. Our experiences would be too profoundly and “paradigm-ly” different. Inasmuch as the rate of advance in science, technology, et al continues to accelerate, will our grandchildren and great-grandchildren react to our lives the way I did to my mythical English sailors?

I look at my young kids and I think what great possibilities are unfolding in front of them and their descendants. Today, we’re all laying out the platform for a future that is completely unfathomable to us today. And if we can just keep from killing each other off, or screwing up the environment, or weakening the great free market system that fuels so many wonderful advances for so many……Ah well, enough daydreaming. Back to the future, I turned around and headed back to the trailhead and my car.

Who to Hire, Part 3

2006-04-05T10:01:00.000-07:00

In today’s knowledge economy, we need new criteria for hiring and promoting people. In my March 22 and March 29 blogs, I made the case that “talent” ought to be a fundamental element in those decisions. Today, I want to point to another often overlooked, but fundamental element. I call it “fit.”

To understand "fit", we have to first appreciate the concept of "tone". Good leaders set a tone for their organizations. Tone is the culture, the climate, the vibe, the mood, the atmosphere that expresses your organization's values and soul. New York City Mayor Michael Bloomberg, explaining how he established his dominating Bloomberg LP financial-data empire, states that one of the most important things done by a CEO or mayor is to "set a tone."

Your job as a leader is to shape the tone that will help you promote competitive success, and then take it seriously. When you do, you’ll hire people who seriously “fit” that tone. If they don’t fit, don’t hire them, and certainly don’t promote them—even if they have talent. In other words, don’t recruit people who may have great credentials but are a lousy match with the values and mood of your organization's tone. For example, both Public Financial Management (a financial services company) and Genentech have strong tones marked by collaboration, openness, caring, and performance accountability. Both companies are getting better at deliberately rejecting strong, talented job candidates who come across as overly concerned with rank, salary, and personal power.

What these companies have learned is this: Fit counts. Yes, talent counts—a lot. But so does the integrity of your organizational tone. Talent without fit is a prescription for dysfunctional conflict and chaos. Fit without talent is a prescription for performance deficits and mediocrity. You need both.

So don’t be expedient. Don’t lower the hiring bar just because you are mesmerized by a candidate’s past achievement, or, on the other end of the scale, if you quickly need a warm body to fill a job. In today’s violently competitive and fragmented marketplace, things like great plans, great reservoirs of capital, and great products are certainly helpful for competitive success, but none of them are as potent or predictive of sustained success as are great people. So stack the deck in your favor: Patiently seek high-talent and high-fit people for your organization.

Who to Hire, Part 2

2006-03-29T12:29:00.000-08:00

In my March 22 blog I made the case that in today’s nanosecond knowledge economy, companies need to hire for overall talent, not just for basic skills and experiences. But operationalizing this nebulous term “talent” (not to mention “overall talent”) is difficult. In my last book, The Leadership Secrets of Colin Powell, I believe I documented the best practical definition of this term.

When Powell was still an officer in the military, he made a very insightful comment about the kind of people to hire--the people who are likely to be your great performers, the people who are likely to act as leaders regardless of their rank or function, the people who one day might well be running the show. In my book I called it “Powell’s Rules for Picking People”. Here’s what he said:

“Look for intelligence and judgment and, most critically, a capacity to anticipate, to see around corners. Also look for loyalty, integrity, a high energy drive, a balanced ego and the drive to get things done.”

Nicely said. Clean. Sparse. And accurate. Consider the elements:

 “Intelligence and judgment”. Note the juxtaposition of terms. Intelligent, but not in a vacuum. Intelligent, as in—sharp and savvy enough to analyze quickly, learn fast, and then make clear practical judgments.
 “Capacity to anticipate, to see around corners.” Able to look ahead, to make sense of trends and fleeting opportunities in the distance; willingness to prepare for tomorrow's realities while addressing today’s. In a world where change is constant, I'm not surprised that Powell rates these attributes as the most critical.
 “Loyalty and integrity.” Once again, a great juxtaposition of terms. Loyalty is not about blind conformity or obedience. Speak your mind. Argue. But once a decision is made, “loyalty and integrity” is about someone who others know they can count on. Someone who’ll walk the talk. Someone who can be trusted after he or she leaves the room.
 “High energy drive.” Enthused, passionate, “up”, willing to persist.
 “Balanced ego”. A strong ego, yes--necessary for self-confidence, for galvanizing others to action, for overcoming hurdles, for pushing back against resistance and negativity, for taking risks. Egocentric or egomaniac—as in self-absorption, self-aggrandizement, and “me as #1”—no. To balance a strong ego with a sense of humility is the essence of balance.
 “Drive to get things done.” Goal-oriented, performance-driven, merit-conscious; being willing to learn new things, to try new things, and to venture into risky territory in order to achieve a mission.

In an earlier article on Powell’s Rules for Picking People, I wrote:

How often do our recruitment and hiring processes tap into these attributes? More often than not, we ignore them in favor of length of resume, degrees and prior titles…..You can train a bright, willing novice in the fundamentals of your business fairly readily, but it’s a lot harder to train someone to have integrity, judgment, energy, balance and the drive to get things done. Good leaders stack the deck in their favor right in the recruitment phase.

Next week I’ll talk about the final element in this mix: the “fit” between talented people and the organization they work in.

Who To Hire, Part 1

2006-03-22T08:04:00.000-08:00

Years ago when I was in graduate school, I took an industrial psychology course that emphasized that both legally and psychometrically, the best way to hire people for jobs was to figure out “can they do the job?” That meant figuring out “A”, the specific components of the job (the job description, the tasks, the expectations, the performance goals); then “B”, figuring out the skills, competencies and attributes necessary to match the needs of the job; and then, finally, “C”, testing for those skills and attributes, and ultimately selecting that applicant whose profile best fit “A” and “B”.

This process sounds logical—and it’s certainly legal—but I believe that nowadays it’s at best a lukewarm predictor of success . The basic skills which are defined as necessary “to do the job” are usually lowest-common denominator skills. They describe the mechanics of the job, the minimum expectations necessary to carry out the demands of the job. But success in work today is also due to imagination, initiative, persistence, caring, risk, courage, collaboration, trustworthiness, and personal responsibility. Obviously, the higher one is in the hierarchy, the more important these attributes become. But in today’s Knowledge Economy, they’re important regardless of rank or function. They need to be addressed and prioritized in the recruiting process, because they help answer the question “can he or she do the job successfully?”

I frequently cross one of the three major bridges around San Francisco. Some of the toll takers are indifferent, some verge on rudeness. Don’t tell me they “can do the job”. No, they aren’t doing the job, because the mechanical part of taking peoples’ money and giving change is only part of the job. They need to be pleasant and helpful too. That’s called customer service. That’s part of doing the job well. I wouldn’t hire anyone for that job unless I was convinced that he or she would make the customer’s experience a good one. And in fact, I wouldn’t hire someone for that job unless I thought they would take initiatives in helping improve operational efficiencies too. That’s called doing the job very well. (And if I was really smart I’d pay more for good people rather than expecting them to be good at the same pay that bad ones get). Extrapolating to management, I would rank the evidence of those factors I listed above—imagination, initiative, etc.—much higher than factors like where the applicant got his degree, or how many years’ experience she has, or can they do the fundamentals of the job description. We need to hire for overall talent, not just for basic skills and experiences. More next week.

When PowerPoint Becomes a Cultural Disease

2006-03-14T13:01:00.000-08:00

This last rainy Sunday, I leafed through Fortune magazine’s 2006 “100 Best Companies to Work For” issue. Since Genentech is prominently featured in my upcoming book, I was especially interested to note that the company was rated #1—the best company to work for.

The Fortune article did a nice job in describing the vibrant, “flout conventional wisdom” culture of the company, but one statement of CEO Arthur Levinson caught my eye. It’s about PowerPoint, which on the surface has nothing to do with culture but in reality has everything to do with it.

I’m all in favor of PowerPoint—I use it myself in corporate presentations. But PowerPoint can be used to camouflage as well as enlighten. We’ve all sat through PowerPoint presentations which are so tediously glutted in obscure data and so humdrum in gobbledygook that they deflate our capacity to think critically. Or alternatively, they are so technologically “gee-whiz” eye-popping that they distract us from the business at hand. These types of presentations are often symptomatic of a culture where obscure communication trumps clarity, or where style trumps substance.

I suspect Levinson would agree. In a December 2005 e-mail to senior managers, he bemoaned “…the spread of unintelligible, gibberish-laden PowerPoint presentations…I have recently sat through several presentations that were simply incomprehensible—mind-numbing, bloated discourses that were full of buzzwords and otherwise devoid of meaningful content. This is a serious problem, and the worst part is that it’s spreading like the disease it is.”

Genentech knows physical disease, and Levinson knows cultural disease. What’s it like in your company? When PowerPoint obscures rather than enlightens, when it sucks out peoples’ energy rather than excites them with compelling information, when it’s more of a show than a force for problem-solving, and when engineers, marketers, department managers, and such are as personally preoccupied in preparing PowerPoint slides as they are in candidly confronting tough problems—then the organization is deep in a cultural morass. I’m not exaggerating. Apparently, neither is Levinson. Clear communication is the glue that holds your organization together. Nip the PowerPoint disease in the bud.

One more thing. Calling in a consultant might aggravate the problem, according to Levinson. Consultants, in his view, do more “corporatespeak” than anyone. Come to think of it, they do more PowerPoint too.

New AT&T, Old AT&T

2006-03-07T11:25:00.000-08:00

So after devouring a series of other companies, SBC ate its rapidly deteriorating parent AT&T last year, and then took over its name. Now, as the new AT&T, the company is poised to buy BellSouth for $67 billion. I’m sure this won’t be the last big deal we read about, because CEO Ed Whitacre's “M.O.” is pretty clear:

• Grow via serial acquisition
• Pay premium prices for prey
• Aim to be a one-stop-shopping telecommunications mecca

Consumer advocates are worried about this deal. They think that it will diminish competition. I think they are worrying needlessly, because I think that ultimately, the new AT&T will implode the same way the old one did. The reasons go right to the heart of Whitacre's strategic biases:

• Growth via serial acquisitions is a prescription for a slow-motion collapsing house of cards (think MCI, Tyco, Vivendi, and Cendant, for starters). If you’re relying primarily on acquisitions, you’re conceding that you don’t really have an exciting value proposition and you don’t have enough cool compelling stuff in the pipeline to grow organically. Investors aren’t fooled. They’re already dinging AT&T.
• Paying top prices is one of the most egregious and common reasons for merger distress. Executives become so enamored of a prospective deal that they overpay, sometimes insanely. Whitacre pays whatever it takes. As of March 6, AT&T’s offer was $35 a share, which is so far above the real worth of BellSouth ($28 a share) that a Sanford Bernstein analyst concluded that AT&T is basically giving away the value of any potential synergies to Bell shareholders.
• The one stop shopping merger fantasy has seriously wounded many high-profile acquirers (think HP under Fiorina, or Schwab, or AOLTimeWarner, for starters). Customers don’t cooperate with the plan (they shop around). New technologies don’t cooperate (they “obsolete” the old acquired ones). New competitors—aggressive fast-growth niche players-- don’t cooperate, either (they do select things better and faster and usually cheaper).

So AT&T’s acquisitions make good copy. Newspapers love them. But at the end of the day, what will AT&T look like? A huge, unwieldy, costly, creaky, one-stop-shopping bureaucracy glutted with mini-empires offering a slew of “me-too”, commoditized, often-mediocre products and services. Hmm, doesn't that sound like the old AT&T?

Irreverant Thoughts on Railroads, Transportation, and Business Strategy

2006-02-28T09:20:00.000-08:00

Seems like every business student and manager knows the proverbial story about the demise of the railroads in the early part of the 20th century. Presumably, it’s because “they thought they were in the train business, but they were actually in the transportation business.” This is supposed to be a profound strategic insight, and you’ve probably heard some variation of it.

I myself heard it again a few days ago after a speech I gave at a corporate conference. The meeting was held at a Disney property in Orlando. Those of you who follow my blogs will find it ironic that after my last two critical pieces about the Disney/Pixar deal, I wound up speaking inside the belly of the beast. But actually, after bringing my wife and kids with me and enjoying the Disney attractions for a few days, I wound up concluding, once again, that Disney knows how to do theme parks right. They’re really good at it. Build the theme parks around high-profile proprietary animation characters, which they’ve done, and you’ve got a helluva high-growth value proposition. In my speech, I acknowledged as such, but I also pointed out that perhaps Disney’s uneven-to-dismal track record in terms of profitability, return on assets, and stock value over the past decade is due to its corruption of that value proposition. It’s not just the shameless and excess exploitation of the characters which winds up diminishing their “specialness” and diluting the Disney brand. There’s something much deeper.

What Disney has done over the past 20 years is to deviate from its core value proposition and head off into many other unrelated businesses by virtue of redefining itself as an “entertainment” company. Accordingly, any market it got into was officially classified as entertainment. During its heyday, (or low-day) Disney was into movies, TV, cable, radio, music, newspapers, book publishing, travel, cruise lines, retail stores, consumer products, special effects and engineering, theater productions, sports franchises—and, oh, yes, theme parks and animation.

You can call these markets “entertainment”, I call them unrelated businesses. There’s no way to dominate all of them. Just because you can do Mickey Mouse great doesn’t mean you can do the Mighty Ducks professional hockey team great (which Disney finally unloaded). Disney’s focus and resources got spread way thin, and its financials reflected it—which, I believe, generated the obsessive exploitation of successful cartoon characters to recoup some income.

So after my speech (which, for the record, included many other topics—I’m not obsessed with Disney!), someone in the audience asked me the railroad-transportation question. He wondered why I had criticized Disney for expanding its strategy to “entertainment” when the prevailing mythical wisdom is that railroads should have expanded their strategy to “transportation.”

Great question! Here was my response: It’s one thing to carefully build on your core strengths and markets to expand their scope and appeal. It’s quite another to willy-nilly enter markets you know nothing about. The railroad industry could have asked: How do we improve service to build share and customer loyalty and repeat business—and charge more while reducing our costs to build margins? Next questions: How can we carefully take our skills and assets to move cargo, not just people? How can we build and expand our presence in both these sectors? How can we expand these sectors themselves to insure they remain high-growth? Are their any other closely related transportation sectors where our skills and assets can organically lead to dominance and strong, profitable growth? These questions are reasonable “transportation” questions.

But using Disney’s strategic logic, the railroads would have jumped into completely unrelated areas in the holy name of “transportation”: ships, cars, bicycles, even the burgeoning air travel business. That would have been suicidal.

It’s time to reconsider the railroad vs. transportation legend because it's misleading. Or maybe it's time to just bury it altogether.

Buzz and Minnie Shouldn’t Have Married

2006-02-15T13:43:00.000-08:00

I think Disney and Pixar should have kept dating instead of jumping into wedlock. They had a great thing going, and I’m afraid this marriage is going to screw things up.

Right up until January, 2006 when the lovebirds tied the knot, I was singing the praises of the decade-long Pixar-Disney alliance. During that time frame, Pixar created films and Disney co-financed, marketed and distributed them—and both parties split the generous proceeds. It was a great relationship, and the fact that Bob Iger replaced Michael Eisner as Disney’s CEO meant that the relationship could continue anew because Pixar CEO Steve Jobs liked Iger with the same magnitude that he loathed Eisner.

That was then. Now, of course, the $342 million Pixar is part of the $31 billion Disney empire. Conventional wisdom says this is a great deal. From Disney’s perspective, it certainly looks that way. Pixar was a very sexy prospect for any suitor. During the term of its partnership with Disney, Pixar unleashed a remarkable six-for-six streak of blockbuster films featuring dazzling animation technology and hugely memorable characters like Buzz Lightyear, Nemo, and Mr. Incredible. The $3.2 billion in worldwide box office sales alone garnered by the Pixar productions dwarfed the comparable figures from Disney’s own animation studios, which produced lackluster films like “Home On the Range,” “Brother Bear,”and “Treasure Planet.” It got to the point that the half dozen Pixar movies accounted for more than half of Disney Studio’s profits. How embarrassing for a company that had cut its teeth with animation—remember Mickey and Minnie, Goofy and Pluto, that sort of thing?

Taken as an entire company, Disney’s performance was even more depressing. From 2003 to 2005, Disney’s sales and profit growth were negligible compared to Pixar’s 50% growth rates. In fact, by 2005, pipsqueak Pixar was posting profit and operating margin percentages that were more than six times those of Disney—to the point that nearly half Pixar’s revenue was profit! The smaller company’s return on assets was double Disney’s—even though Pixar didn’t even release a new film in 2005.

You get the picture (no pun intended). Acquiring Pixar puts the shine back in Disney’s animation business—and its financials. Disney also gets Pixar’s proprietary technologies and its nice cash hoard. Presumably, it’ll get all of Pixar’s exemplary expertise and talent too. And the $7.4 billion purchase price (for a $342 million company!) was in stock rather than real money. For Disney, the deal looked like a no-brainer.

What does Pixar get in return that it couldn’t get from an alliance? I’m still trying to figure that out. Maybe Pixar gets some deep pocket protection just in case the next films (“Cars”, etc.) are bombs. Batting 6 for 6 over the last ten years is a remarkable feat, and maybe Pixar executives were afraid they couldn’t keep up the perfect streak, nor cushion a box-office failure, nor maintain killer financials in the face of a declining DVD industry. Maybe it’s that now Pixar people regain creative control over Woody and Buzz and all the other characters. Maybe it’s that Steve Jobs—who suffered a near-fatal illness last year-- got burnt out running both Pixar and Apple and finally wised up as to the meaning of life. Maybe Pixar executives Ed Catmull and John Lasseter just wanted more high-profile jobs. Who knows? Your guess is as good as mine, but in light of Pixar's exceptional independent successes over the past decade, none of these reasons is persuasive as a strategic justification for jumping into bed with Goliath.

Frankly, I think the reason that Pixar went 6 for 6 is because it wasn’t a huge, deep-pocket company. Pixar people had to rely on their talent, agility, edginess, boldness, passion, collaborative culture, proprietary technologies and constant innovation. Now the entire company will be thrown into the bear hug of a massive, often dysfunctional media conglomerate. Will the “Pixar way” survive? Will the Pixar people stay? A lot of acquisitions which look great on paper wind up looking crappy in practice.

In fact, I’m left wondering if the factors which created value in the partnership will destroy value in the marriage. As an independent company, Pixar was all about quality and imagination, technology and storytelling, delight and magical animation. Disney is about quantity, leverage, promotion, distribution, and merchandising. Pixar averaged one film every 18 months, and sometimes postponed a film’s launch until it was just right. And Pixar people loathed the notions of film sequels and they doubly loathed any exploitation of their beloved characters. Disney has the opposite perspective: Crank out more films faster, market the hell out of them, build sequel after sequel, and expose the characters to the hilt in as many products and venues as possible, all in the name of leverage. Within an alliance, these differences made synergistic sense, and offered a nice check-and-balance to both partners. Within an acquisition, these differences can create deep and fundamental conflict. Now couple these differences with the vast disparities in corporate traditions and cultures (agile, entrepreneurial, and egalitarian at Pixar vs. layered, bureaucratic, and turf-ist and Disney), and you have a potentially explosive cocktail that might skewer this deal alongside so many other disappointing ones.

I wish they had kept on dating. They were such a fun, power-couple. Now my fear is that once both parties settle into the post-wedding daily life of marriage, Disney might gradually strangle the goose that laid the golden eggs. I’m not a fan of spousal abuse.

What Makes Rupert Run?

2006-02-08T12:55:00.000-08:00

I just enjoyed a lively breakfast with Rafael Pastor, who is the CEO of an interesting company called Vistage International, based in San Diego. Vistage is the world’s largest CEO membership organization. It offers structured development programs and peer-to-peer coaching for CEO’s of primarily small to medium-sized companies. Vistage’s track record is remarkable; on average, its member companies grow 250% faster than their non-member counterparts.

But that’s not what I wanted to talk to you about. Rafael Pastor used to be a very senior guy at Rupert Murdoch’s News Corporation, a massive media empire that touches half the world’s population. In addition to several prominent international posts, Pastor ran the company’s U.S.A. Networks International, and accordingly, he wound up regularly interacting with the great man himself. While reminiscing about his experiences at News Corp, Rafael said that Murdoch’s great leadership could be summarized by five attributes:

1. He is an instinctive visionary. Murdoch doesn’t ignore data. But what’s special about him is that unlike many “professional” managers, he doesn’t simply rely on the data to make the big decisions. He draws from all sorts of available data on markets and his company in order to keep his decisions grounded, and he trusts his own experience, knowledge, and instincts about his business. Murdoch still has that wondrous trust in his gut about where the market is going and what his company can do to capitalize on it. So don’t expect him to make big strategic decisions based strictly on a spreadsheet analysis. And don’t expect him to be afraid to take chances in pursuing big picture unchartered directions that will set News Corp apart from his competitors.

2. He has an intuitive sense of what appeals to customers. Unlike many media moguls who operate in rarified corporate atmospheres and rely on sterile market research for insights about customers, Murdoch makes it a point to really, truly understand the average customer. What are their lives about, what turns them on, what are they really like? The more a leader talks to customers, reads stories about them, asks questions about them, probes about their likes and dislikes, and observes them in action, the more he or she can feel confident about using “intuition” to make bigger decisions about what they’d be willing to buy.

3. He pays attention to details. Murdoch may sit on a $55 billion asset throne, but the man’s antennae are remarkably attentive to key operational, pricing, and marketing decisions that are germane in every pocket of his global empire. That sort of attention does two things. One, it gives everyone in News Corp the message that discipline and solid execution are expected in any leadership position. Two, it allows Murdoch to be that “instinctive” visionary and “intuitive” customer advocate without falling prey to recklessness or just plain stupidity. In my upcoming book Break From the Pack, due mid-year, I describe effective leaders as having a “passion for purpose” and a “passion for precision”. Too bad the book is already in production. I would have included Murdoch as one of my exemplars.

4. He’s an excellent dealmaker. Let’s face it, the track record of big media mergers and acquisitions stinks. (Think about the dismal deals like AOL and TimeWarner, Disney and CapMarketsABC, Viacom and CBS, Matshusita and MCA, Sony and BMG, Vivendi and Universal, just for starters). Yet here’s a guy who’s an outright serial acquirer and his track record is darn impressive. I don’t think dealmaking is part of anyone’s DNA. Rafael agreed that Murdoch’s effectiveness is in large part due to the issues in #1, 2, and 3 above. That means that his acquisitions will be attuned to cutting edge visions, deep customer needs, and a commitment to detail-rich execution. And that means they’re more likely to succeed.

5. He leads by inspiration. Murdoch, for all his wealth and power, is not what you'd call a "strong dominant" personality. He’s not particularly “charismatic” either. Yet people who work for him sense that he’s extraordinary. People want to please him. Maybe it’s his low-key devotion to his business. Maybe it’s his lack of outsized ego. Maybe it’s his ability to forge new directions while staying committed to the customers. Maybe it's that he leads by showing others that he too is honestly inspired by the work he does. All I know is that even someone as successful as Rafael Pastor still talks about Murdoch with notable admiration and attachment.

These five attributes are not part of your normal MBA curriculum, but they're worth considering and cultivating if you’re aiming for a senior leadership career.

Knowledge Workers (That’s Us!) Need a New Organization

2006-01-31T07:05:00.000-08:00

We’re living in a “knowledge economy” where intangibles like brains and innovation trump tangibles like corporate mass and size. So I was especially eager to read the Economist’s “survey” of this issue in its January 21 issue. I recommend it to you (see www.economist.com) , and in particular I want to bring one passage to your attention. Especially since I’ve been singing this tune with my clients for years, I was especially pleased to see it so eloquently presented. Here’s what the Economist said:

Companies now are investing huge sums in such systems of “knowledge management”, which include their intranets and their internal databases. One company describes its intranet as “a vibrating current of what is going on in the business”. The challenge is to ensure that employees can plug into this vibrating current as and when they need it.

Re-read the last sentence. The key to effective knowledge management is not for leaders to censor, filter, and dole out information to employees as they (leaders) see fit. (I’ve seen a lot of this careful editorial censorship when executives present supposedly “sensitive” data like financials and competitive information to the rank and file). Nor does effective knowledge management occur when leaders simply overwhelm employees by sending them copies of just about every message and document and fact that flows through the organization. When people are drowning in data, they can’t effectively use information. Either alternative reduces knowledge management to the status of lip service, or a soft mockery.

Instead, the solution is to provide employees with the capacity to quickly access whatever information, document, communication, archive, or person that they need to in order to make an optimal decision. Each employee and manager decides what he or she needs and doesn’t need, and when. They decide which spigot to use, and when to turn it on and off.

But don’t believe me. Here’s what the Economist says:

There are three broad approaches to knowledge management. One is to create a system where all information goes to everybody, which is hugely inefficient; the second tells people what others think they need to know, which may not match their real needs; and the third enables them to find for themselves whatever they want to know. Companies like to say that they aim for the third approach, but they do not always find it easy.”

They don’t find it easy because they operate in a closed-door, “for-your-eyes-only” culture or with information systems that are technologically weak or not geared towards frictionless candor. In other words, the organization must have both an “boundariless”, transparent culture and the most state-of-the-art information systems and technologies. If you really want to capitalize on the knowledge economy, start addressing these culture and technology issues, and invest heavily in training people to operate in that sort of environment.